What Is a Statement of Retained Earnings?

The Statement of Retained Earnings is the second financial statement that should be prepared in the accounting cycle. Retained earnings are the amount of income left in the company after dividends are paid. This income is then reinvested in the firm for various projects. Here is an example of a statement.

Prepare the Heading for the Statement of Retained Earnings

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A Statement of Retained Earnings should have a three-line header. The first line is the name of the company. The second line is simply, "Statement of Retained Earnings." The third line is "For the Year Ended XXXXX." For the word "year," any accounting time period can be entered.

State the Balance of Retained Earnings From the Prior Year

The first item on the Statement of Retained Earnings should be the balance of retained earnings from the prior year. This comes from the prior year's balance sheet. Let's say that the balance of retained earnings for our hypothetical firm is $20,000. The first line for the Statement of Retained Earnings would look like this:

  • Retained Earnings, December 31, 2016 $20,000

Add Net Income From the Income Statement

The Statement of Retained Earnings should be the second financial statement prepared. The Income Statement is the first. Let's say that net income from the hypothetical company is $10,000. That is the first item added to the Statement of Retained Earnings. Our retained earnings statement now looks like this:

  • Retained Earnings:December 31,2016 $20,000
  • Plus: Net Income 2017 +10,000
  • Total $30,000

If the company has a net loss on the Income Statement, then the net loss is subtracted from the existing retained earnings.

Subtract Dividends That Your Company Pays Out to Investors

Does your company pay dividends? If it does, you subtract the amount of dividends your company pays out of net income. If it does not, then you subtract $0. Let's say your company's dividend policy is to pay 50 percent of its net income out to its investors. In this example, $5,000 would be paid out as dividends and subtracted from the current total.

  • Retained Earnings, December 31, 2016 $20,000
  • Plus: Net Income 2017 +10,000
  • Total $30,000
  • Minus: Dividends (5,000)

Dividends are treated as a debit in the retained earnings account whether they've been paid or not. If, for instance, Widget Corp's board of directors declare a dividend of $5.00/share on 10,000 shares stock, $50,000 is then deducted from the company's retained earnings even if the dividend has not yet been paid. 

Prepare the Final Total for Retained Earnings for 2017

Subtract out the dividends, if you pay dividends, and total the Statement of Retained Earnings. This is the amount of retained earnings that you post to the retained earnings account on your new 2016 balance sheet.

  • Retained Earnings, December 31, 2013 $20,000
  • Plus: Net Income 2014 $10,000
  • Total: $30,000
  • Minus: Dividends Paid ($5,000)
  • Retained Earnings, December 31, 2014 $25,000

This completes the Statement of Retained Earnings.

Additional Information

Although preparing the basic statement of retained earnings is relatively straightforward, there are often a few more details shown in an actual retained earnings statement than in the example. The par value of the stock (its declared value at issuance) is sometimes indicated. Paid-in capital can also be treated separately. Paid-in capital is that share of the company's equity contributed by shareholders rather than generated from operations. Treasury stock is also indicated as a separate asset. Treasury stock is the stock that was issued by the company, then repurchased in a stock buyback.

A Cautionary Word About Compliance

When filling out any financial statements, you should always check with your accountant or your business's financial planner to make sure you are in compliance with the most updated forms and procedures.