Statement of Retained Earnings
| The statement of retained earnings is used to reconcile the changes in the retained earnings account from period to period. |
Several economic events can impact retained earnings, but most commonly, income for the period increases retained earnings, and losses and distributions during the period decrease retained earnings.
Financial Report Sample: Statement of Retained Earnings
For example, Sunny started his business in 2010 and earned net income of $15,283 during the year. His statement of retained earnings would therefore appear as follows after year one:
| Financial Report Sample: Statement of Retained Earnings | |
| Retained Earnings, Jan. 1, 2010 | – |
| Net Income: | $15,283 |
| Deduct Dividends | – |
| Retained Earnings, Dec. 31, 2010 | $15,283 |
Because Sunny started his business in 2010, the beginning retained earnings balance was zero. Sunny did not have any distributions for the period, so the ending balance equals the net income for the period, as shown on the sample income statement. After Sunny closes the income statement accounts, the amount is rolled into the retained earnings account, a permanent account now showing on the accounting balance sheet for the period.
Companies can produce the income statement and then attach the statement of retained earnings. The beginning balance in retained earnings is added to net income (loss), and distributions or declared dividends are deducted to arrive at the ending retained earnings balance. This business financial statement is called the Statement of Income and Retained Earnings. Alternatively, a separate statement of retained earnings may be prepared.
In addition to the income statement, the balance sheet, and the statement of cash flows, GAAP also requires that companies show changes in both retained earnings and other equity accounts in each reporting period. Companies can fulfill this requirement by including notes to the financial statements and separate schedules. However, most companies simply combine the statement of retained earnings with changes in other equity accounts to produce the statement of stockholders equity.
Because retained earnings is a subsection of stockholders equity, Sunny can include the changes to retained earnings in the more comprehensive statement, the statement of stockholders equity.
For example, Sunny started his business by making a $50,000 investment into the business. At the end of his first year in business, Sunny made a profit of $15,283 and did not have any distributions for the period. This affects each of the accounting statements as follows:
Retained Earnings Formula
| Beginning Retained Earnings | + Net Income for the Period | – Distributions (Dividends) | = Ending Retained Earnings |
| – | + $15,283 | – | = $15,283 |
Stockholders Equity Formula
| Contributed Capital | + Retained Earnings | = Stockholders Equity |
| $50,000 | + $15,283 | = $65,283 |
The statement of stockholders equity is widely used to fulfill GAAP’s requirement that financial statements show all changes in the equity accounts because it shows both changes to retained earnings in addition to changes in other equity accounts for the reporting period.
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