When it comes to managing your business’s finances, you can never be too organized. Creating financial statements paints a picture of your company’s financial health. Financial statements help with decision making and your ability to get outside financing. One statement you could create is the retained earnings statement.
The statement of retained earnings is not one of the main financial statements like the income statement, balance sheet, and cash flow statement. However, it can be a beneficial tool for many companies. And like the other financial statements, it is governed by generally accepted accounting principles.
What is a statement of retained earnings?
A statement of retained earnings is a financial statement that lists a business’s retained earnings at the end of a reporting period. Retained earnings are business profits that can be used for investing or paying liabilities. The statement of retained earnings can either be an independent financial statement, or it can be added to a small business balance sheet.
The statement of retained earnings is also known as the statement of owner’s equity, equity statement, or statement of shareholders’ equity. Although the statement of earnings is not one of the main financial statements, it is useful in tracking your business’s retained earnings and seeking outside financing.
Create a statement of retained earnings each accounting period. The statement of retained earnings shows how your business either increased or decreased its retained earnings between accounting periods.
If your retained earnings account is positive, you have money to invest in new equipment or other assets. Or, you can pay down some of your business debt. If your retained earnings are negative, you have a deficit.
Statement of retained earnings formula
You must use the retained earnings formula to set up your statement of earnings. The formula helps you determine your retained earnings balance at the end of each business financial reporting period.
Here is the retained earnings formula:
Retained Earnings = Beginning Retained Earnings + Net Income – Dividends Paid
Your beginning retained earnings are the funds you have from the previous accounting period. Net income (or loss) is the amount of your business’s revenue minus expenses. Dividends paid is the amount you spend on your company’s shareholders or owners, if applicable.
Example
Let’s say your business has beginning retained earnings of $10,000 and net income of $4,000. You paid dividends of $7,000.
Retained Earnings = $10,000 + $4,000 – $7,000
Retained Earnings = $7,000
Your retained earnings for this accounting period would be $7,000.
Creating a statement of retained earnings
The statement of retained earnings is generally more condensed than other financial statements.
The title of your statement of retained earnings should include your company name, the title of the financial statement (Statement of Retained Earnings), and the time period it covers. You could have monthly, quarterly, or yearly accounting periods.
Basically, you will list out the values for each part of the retained earnings formula.
You will need to list your amount of retained earnings at the end of the previous accounting period. You can obtain this information from your business’s balance sheet or previous statement of retained earnings.
Next, you must include your business’s net income or net loss for the current accounting period. You can find this information on your business’s income statement.
Don’t forget to list the amount you paid in dividends. If you don’t owe dividends, you can enter $0 for this line.
Finally, you can calculate the amount of retained earnings for the current period. Just like in the statement of retained earnings formula, find the total by adding retained earnings and net income and subtracting dividends.
You can expand on the information listed in your statement of retained earnings if you want, such as par value of the stock, paid-in capital, and total shareholders’ equity. Or, you can keep your statement of retained earnings short, sweet, and to the point.
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This article is updated from its original publication date of April 5, 2018.
This is not intended as legal advice; for more information, please click here.