Statement of Retained Earnings

What is the Statement of Retained Earnings?

Statement of Retained earnings is an important financial statement that discloses the amount of retained earnings. Retained earnings here is the proportion of profit retained in the business after declaring the dividends. This proportion of profits is plowed back in the company and returns are generated from it. Thus, the statement of retained earnings reflects the cumulative profits or earnings of a firm after paying the dividend. After, having a good amount of profits, the company at the discretion of the board of directors pay a dividend from it and preserve the remaining amount as retained earnings.

It is a financial statement depicting any changes in the retained earnings for a specific accounting year. The statement reconciles the starting and ending retained earnings prepared from another financial statement namely the income statement. Companies follow Generally accepted accounting principles(GAAP) while preparing the statement of retained earnings.

The main aim of any company retaining the profit is to earn higher returns on it. So, it is more advisable to retain the profits rather than borrowing from outside at a higher cost. This statement is also known as retained earnings statement or Statement of Shareholder’s equity or statement of owner’s equity or the equity statement.

Formula of Statement of Retained Earnings

Beginning retained earnings + Net income – Dividends = Ending retained earnings

Format of Statement of Retained Earnings

XYZ Co (The company Name)
Statement of Retained Earnings
 For the year ended XXXX
ParticularsAmount
Retained earnings( Prior year)
Add: Net Income from Income Statement
Less: Net Loss from Income Statement
Less: Any dividend paid
Total Retained Earnings( Carried Forward to Balance Sheet)

Uses

The main aim behind preparing the statement of retained earnings is to show the amount of profit reinvested in the business. It helps in increasing the confidence of investors in the company.

Who Uses It?

Investors of a company are the main users of this statement. They can make out from this statement about how much amount of profit is declared as a dividend, and how much is retained in the business. In general, a firm that is in the maturity stage will pay a regular dividend. And a growing firm retains more in the business to meet the growing funds’ requirement.

Thus, the statement of retained earnings can assist an investor in the following ways:

  • The dividend payment which will help in predicting future dividend
  • The retained earnings amount that is reinvested in the firm that helps in predicting a future increase in prices of share.
  • It can also be used to compare two companies before making an investment decision.

Statement of Retained Earnings

Ideal Amount of Retained Earnings

The amount of retained earnings varies from company to company. A company that belongs to a capital-intensive sector will require more amount of retained earnings.  while a stable company requiring less capital will have fewer amounts of retained earnings.

How to Prepare Statement of Retained Earnings?

For preparing this statement, we make use of other financial statements. Let’s see how.

  • Previous period’s Balance Sheet  reflects the opening balance of retained earnings statement under the heading of Owner’s Equity
  • Net income figure is taken from the current period’s Income Statement
  • Payment of dividend on preference shares and ordinary shares is considered from cash flow
  • The closing balance of retained earnings is reflected in current Balance Sheet under the owner’s equity

Example

The following example portrays the statement of retained earnings in a simplified format.

 Krishna Plywood Company’s Statement of Retained Earnings for the year ended 2018:

ParticularsAmount
Retained earnings at  31st December 2017$ 50,000
Add: Net Income from Income Statement   for the year ended 31st December 2018$ 7500
Less: Dividend paid to equity shareholders(-$1500)
Total Retained Earnings( Carried forward to the Balance sheet)$ 56000

If the company has net loss instead of net income than the following statement will be prepared

Krishna Plywood Company’s Statement of Retained Earnings for the year ended 2018:

ParticularsAmount
Retained earnings at  31st December 2017$ 50,000
Add: Net Income from Income Statement   for the year ended 31st December 2018(-$ 7500)
Less: Dividend paid to equity shareholders(-$1500)
Total Retained Earnings( Carried forward to the Balance sheet)$ 41000

Conclusion

In conclusion, to recapitulate the statement of retained earnings is a summary. Thus, It reflects the amount that is retained from profits over the number of years after paying shareholders their dividend. So, this statement gives details of retained earnings at the beginning, net income or net loss generated in the current year, the dividend paid in the current year and at the end, Hence, it also shows the resultant amount of retained earnings carried forward to balance sheet.

Last updated on : August 1st, 2019
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