Statement of Retained Earnings Fully Explained

June 9, 2022

Statement of Retained Earnings Fully Explained

The Statement of Retained Earnings is a Financial Statement prepared by corporations that details changes in the volume of Retained Earnings over some period. Retained Earnings are profits held by a company in reserve in order to invest in future projects rather than distributed as dividends to shareholders.

How Do You Prepare a Statement of Retained Earnings?

Here's how to prepare a Statement of Retained Earnings for your business:

Step 1:

Determine the financial period over which to calculate the change

Companies typically calculate the change in Retained Earnings over one year, but you could also calculate a Statement of Retained Earnings for a month or a quarter if you want.

Step 2:

Calculate beginning Retained Earnings

Your beginning Retained Earnings are simply the previous period's ending Retained Earnings. Retained Earnings appear on the equity portion of the Balance Sheet (Assets = Liabilities + Equity).

Let’s say you’re preparing a Statement of Retained Earnings for 2021. Your beginning Retained Earnings are the Retained Earnings on the Balance Sheet at the end of 2020 ($515,000, for example).

Step 3:

Add Net Income

If your business recorded a net profit of, say, $250,000 for 2021, add it to your beginning Retained Earnings.

Step 4:

Subtract dividends

Next, subtract the dividends you need to pay your owners or shareholders for 2021. Let's say that's $6,000.

What is the Statement of Retained Earnings Equation?

Here is the Statement of Retained Earnings formula:

Beginning Retained Earnings + Net Income – dividends = Ending Retained Earnings

Company Name: Acme Inc

Statement of Retained Earnings

Fiscal Year Ending Dec 2021

Beginning Retained Earnings balance – Dec 31, 2020

$ 520,000

Prior period adjustments: Correction to depreciation expense

$ (5,000)

Adjusted Retained Earnings – Dec 31, 2020

$ 515,000

Plus Net Income

$ 250,000

Less Cash Dividends paid to Stockholders

$ (6,000)

Retained Earnings – Dec 31, 2021

$ 759,000

What is Retained Earnings on Balance Sheet?

Retained Earnings represent a portion of the business's Net Income not paid out as Dividends. This means that the money is placed into a ledger account until it is used for reinvestment into the company or to pay future Dividends. Understanding your company's Retained Earnings is important because it enables you to understand how much money is available for activities like expansion or asset acquisition. 

The Shareholder’s Equity section of the Balance Sheet has Retained Earnings listed at the end of each accounting period. See below an Balance Sheet example imported to Google Sheets automatically with LiveFlow with Retained Earnings as an example:

Balance Sheet:

Balance Sheet generated by LiveFlow

What is the Difference Between an Income Statement and Statement of Retained Earnings?

An Income Statement is a financial statement that shows you the company’s Income and Expenditures. It also shows whether a company is making Profit or Loss for a given period.

See below an Income Statement example imported to Google Sheets automatically with LiveFlow.

Income Statement:

Income Statement generated by LiveFlow

The Statement of Retained Earnings shows the accumulated portion of a business’s Profits that are not distributed as Dividends to shareholders but instead are reserved for reinvestment back into the business.

Use LiveFlow to pull your Balance Sheet with Retained Earnings from QuickBooks into Google Sheets in real-time, you can create Live Reports with LiveFlow. Download LiveFlow from Google Workspace Marketplace or QuickBooks App Store to track your performance automatically.

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