Definition
The financial accounting term statement of retained earnings refers to a financial report used by companies to reconcile the starting and ending balance of retained earnings. Typical line items in this statement would include operating loss or profit, dividends, and any redemption of common stock.
Calculation
Ending Retained Earnings = Beginning Retained Earnings − Dividends + Net Income
Explanation
Also known as the Statement of Retained Earnings and Stockholder's Equity, the purpose of this report is to explain the changes to retained earnings in the current accounting period. The statement of retained earnings uses information from the income statement and provides it to the balance sheet since retained earnings is a critical component of owner's equity.
Whenever evaluating the financial condition of a company, the statement of retained earnings should be examined alongside the income statement. This provides the reader or analyst with a more complete understanding of the company's profitability. The descriptions appearing in this statement will often refer to items that directly affect net income.
In addition to beginning and ending balances, net income and dividends, this report may contain certain irregular items such as the correction of accounting errors, which accounting practices requires the company to report as a prior period adjustment.
Example
Company A's income statement indicates net income of $4,283,000, dividends of $1,550,000, and a beginning balance of $28,348,000 in retained earnings. Company A did not have any irregular items. The statement of retained earnings for Company A would be as follows:
| Company A | |
| Statement of Retained Earnings | |
| Retained Earnings, January 1, 20XX | 28,348,000 |
| Add: Net Income | 4,283,000 |
| Less: Dividends Paid | 1,550,000 |
| Retained Earnings, December 31, 20XX | 31,081,000 |
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