Retained Earnings Statement

The Statement of Retained Earnings

The retained earnings statement is one of the four main financial statements and is the link between the income statement and the balance sheet.

The statement uses information from the beginning balance sheet and the income statement for the year, and provides information to the ending balance sheet.

To understand the retained earnings statement we first need to explain the meaning of retained earnings.

What is Retained Earnings?

Retained earnings refers to the net income retained by a business after any distribution (dividends) to the equity holders. In effect the net income is split between the amount paid out to equity holders and the amount retained within the business.

Retained Earnings for the Year
Net income
Dividend Retained earnings for the year

Retained earnings is increased by net income and is reduced by dividends. The dividends are the amount which has been declared for the year not the amount paid during the year.

The retained earnings for each year accumulate on the Retained Earnings account which forms part of the owners equity in the balance sheet.

Retained Earnings Account
Retained earnings Year 1 Retained earnings Year 2 Retained earnings Year 3
Retained earnings account balance

This account forms part of the equity of the business, as it is retained in the business but belongs to the equity holders.

What is the Retained Earnings Statement for?

The purpose of the retained earnings statement is to reconcile the beginning and ending balances on the retained earnings account. The ending balance on the retained earnings account shown in the ending balance sheet, is given by the retained earnings equation

Statement of Retained Earnings Formula

The formula for retained earnings is as follows:

Ending retained earnings = Beginning retained earnings + Net income – Dividends

Retained Earnings Statement Sample

The statement of changes in retained earnings sample shown below is typical of how a business will present the balance of retained earnings.

Retained Earnings Statement
Beginning retained earnings 38,000
Plus: Net income 40,000
Less: Dividends -10,000
Ending retained earnings 68,000

Is Retained Earnings Equity?

The net income of a business belongs to the owners, we have seen above that the net income can either be paid out to the owners by way of dividend, or kept within the business, as retained earnings. Either way, the net income and therefore the retained earnings, belongs to the owners and forms part of the owners equity.

The accounting equation tells us

Assets = Liabilities + Owners Equity

The owners equity includes amounts invested by the owners (capital) and net income of the business which have been retained. The accounting equation can be re written

Assets = Liabilities + Owners capital + Retained Earnings

Retained Earnings Statement Example

As an example, suppose a business has net income for the year of 60,000 and declares a dividend of 10,000, and the balance on the retained earnings account at the beginning or the year was 20,000. The retained earnings are given by:

Retained earnings = Net income – Dividend = 60,000 – 10,000 = 50,000.

The net income has been split between 10,000 paid out to equity holders, and 50,000 retained within the business. The amount retained still belongs to the equity holders and forms part of the owners equity.

The ending balance on the retained earnings account will be:

Ending balance = Beginning balance + Retained for the year
Ending balance = 20,000 + 50,000 = 70,000

The retained earnings statement will show:

Retained Earnings Statement
Beginning retained earnings 20,000
Plus: Net income 60,000
Less: Dividends -10,000
Ending retained earnings 70,000
Retained Earnings Statement July 20th, 2017Team

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