Is Retained Earnings on the Income Statement?

Retained earnings represent the cumulative profits a company has earned since its inception, minus any amounts paid out to shareholders as dividends. These accumulated earnings are kept within the business for reinvestment or future use.

Understanding Core Financial Statements

To understand where retained earnings fit, it is important to consider the three primary financial statements. The Income Statement, also known as the Profit & Loss Statement, summarizes a company’s financial performance over a specific period. It details revenues earned and expenses incurred to calculate net income or loss for that period.

The Balance Sheet provides a snapshot of a company’s financial position at a single point in time. It lists assets, liabilities, and equity, adhering to the fundamental accounting equation: Assets = Liabilities + Equity. The Statement of Retained Earnings, often part of the Statement of Shareholders’ Equity, specifically tracks the changes in retained earnings over an accounting period.

Retained Earnings on the Balance Sheet

Retained earnings are a component of shareholders’ equity and are reported on the Balance Sheet. This signifies the portion of a company’s accumulated profits that have not been distributed to owners, but instead held onto and reinvested.

This accumulated balance represents financial resources generated from past operations that remain within the company. These funds can be utilized for various purposes, such as funding new equipment, research and development, or reducing debt obligations. Retained earnings on the Balance Sheet indicate the portion of equity derived from a company’s accumulated profitability over time.

The Link: Income Statement to Retained Earnings

Retained earnings are not presented as a line item directly on the Income Statement. The Income Statement reports a company’s revenues and expenses for a specific period, culminating in the net income or loss for that period. Retained earnings, however, represent a cumulative balance of profits accumulated over all prior periods, not just the current one.

The net income (or loss) calculated on the Income Statement for a period directly impacts the retained earnings balance. This net income is added to the retained earnings balance from the beginning of the period. Any dividends paid out to shareholders during the period are then subtracted from this sum. This calculation results in the ending retained earnings balance, which is then reported on the Balance Sheet.