Overview
The Retained Earnings Statement is a critical financial statement that provides a detailed reconciliation of the retained earnings account on a company’s balance sheet. It documents the beginning and ending balances of retained earnings, highlighting changes made due to various factors such as profits or losses from operations, dividends declared, and other items impacting the retained earnings.
Key Components
- Beginning Retained Earnings: The starting balance of retained earnings at the start of the accounting period.
- Net Income or Loss: The profit or loss generated from business operations during the period.
- Dividends: Payments made to shareholders which reduce the retained earnings.
- Adjustments: Other items charged or credited to retained earnings, including prior period adjustments and accounting changes.
- Ending Retained Earnings: The final balance of retained earnings at the end of the accounting period.
Examples
Example 1: Positive Retained Earnings Growth
A company starts the year with retained earnings of $500,000. During the year, it earns a net income of $200,000 and declares dividends of $50,000. The retained earnings at the end of the year would be calculated as follows:
Beginning Retained Earnings: $500,000
+ Net Income: $200,000
- Dividends Declared: $50,000
= Ending Retained Earnings: $650,000
Example 2: Decline in Retained Earnings
A company begins the year with retained earnings of $600,000. It incurs a net loss of $100,000 and declares dividends of $30,000. The year-end retained earnings calculation is:
Beginning Retained Earnings: $600,000
- Net Loss: $100,000
- Dividends Declared: $30,000
= Ending Retained Earnings: $470,000
Frequently Asked Questions
What is the purpose of the Retained Earnings Statement?
The purpose of the Retained Earnings Statement is to detail the changes in retained earnings over an accounting period, providing insight into how a company manages its earnings—whether they are being reinvested into the business or distributed as dividends to shareholders.
How does the Retained Earnings Statement differ from other financial statements?
Unlike the income statement, which summarizes revenue and expenses, the retained earnings statement focuses on the changes in equity originating from the company’s operations and distribution policies. The balance sheet, on the other hand, provides a snapshot of all the company’s assets, liabilities, and equity at a given point in time.
Can a company have negative retained earnings?
Yes, a company can have negative retained earnings if its cumulative losses and dividends exceed its cumulative earnings. This is often referred to as an accumulated deficit.
Related Terms
Balance Sheet
A financial statement that provides a snapshot of a company’s financial position at a particular point in time, listing assets, liabilities, and equity.
Net Income
The total profit of a company after all expenses and taxes have been deducted from revenue. This figure is added to the retained earnings.
Dividends
A distribution of a portion of a company’s earnings to its shareholders, typically in the form of cash or additional shares.
Accounting Period
A specified timeframe for which financial reports are prepared, such as a quarter or a fiscal year.
Online References
Suggested Books for Further Studies
- Bragg, S. M. (2019). Accounting Made Simple: Accounting Explained in 100 Pages or Less.
- Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting.
- Wild, J. J., Shaw, K. W., & Chiappetta, B. (2018). Fundamental Accounting Principles.
Fundamentals of Retained Earnings Statement: Accounting Basics Quiz
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