Definition and explanation
The statement of retained earnings is a financial statement that summarizes the changes in the amount of retained earnings during a particular period of time.
Retained earnings is the portion of net income that a company does not distribute among its shareholders but retains in the business for various purposes such as growth of business in future and meeting the debt obligations etc. It increases when company earns net income and decreases when company incurs net loss or declares dividends during the period. Retained earnings appears in the balance sheet as a component of stockholders equity.
The statement of retained earnings is prepared after the preparation of income statement but before the preparation of balance sheet because it is used to compute the amount of retained earnings at the end of the period to be shown in the balance sheet.
The computation of retained earnings figure at the end of the period can be shown in the form of the following formula/equation:
|Retained earnings at the end = Retained earnings at the beginning + Net income – Dividends|
Format of the statement of retained earnings
A simple format of statement of retained earnings is given below:
Notice that the statement of retained earnings starts with the beginning balance of retained earnings. The net income is added and the net loss is subtracted; any dividends declared during the period (whether paid or not) is also subtracted in the statement of retained earnings. The resulting figure is the retained earnings at the end of the period that appears in the stockholders’ equity section of the balance sheet at the end of the period.
The adjusted trial balance and the income statement of Business Consulting company are given in income statement article. Using that information, we can prepare the statement of retained earnings of the company as follows: