Financial statements can provide insight into the way you manage your organization in the long term. Lenders and investors may want to see a statement of retained earnings for your company, so we’ll walk you through everything you need to know about these short—but important—documents.
What is a statement of retained earnings?
A statement of retained earnings shows changes in net income or profit after dividends are paid out to shareholders. This amount can then be reinvested into the business, or retained for the following year.
Retained earnings can indicate what your company does with profits, how much is paid out to shareholders, and how much is retained over time.
Typically this statement covers a period of one year, but it can also cover a quarter, a month, or any period you want, as long as that amount of time is made clear in the statement. If you are an established company, investors and creditors will likely want to see your statements going back several years.
Why are retained earnings important?
Why do you need to keep track of retained earnings? Potential lenders and investors will want to see a statement so they can make sure your business is profitable enough to repay any debts you take on. Creating a business budget can help reduce areas of overspending to be able to increase retained earnings.
In addition, there are other benefits of creating a statement of retained earnings. It offers insights into your business’s accumulated earnings, and shows how much you can reinvest in your business each year.
How to calculate retained earnings
The retained earnings formula is straightforward:
Beginning retained earnings + net income – dividends = retained earnings
If you did not have a net income for the year and instead had a loss, you would subtract that loss instead of adding an income. Your dividends include both cash dividends and stock dividends. If this is your first year of business, your beginning retained earnings would be zero.
Want more details? Check out the steps below.
How to prepare a statement of retained earnings
If you don’t have a finance team to create the statement for you, don’t worry, we’ve got your back. You can work with your accountant to create a statement following five simple steps:
Step 1: Gather your balance sheet and income statements
Having these items on hand will help the rest of the process go smoothly. If you have previous statements of retained earnings, those will help too.
Step 2: Determine the financial period for this statement
This can be a year, a quarter, or any other period necessary for the project. Make sure the time period is clearly stated in your final document.
Step 3: Record the beginning retained earnings
This is also called the previous period’s balance. If you’ve made a statement of retained earnings for your business in previous periods, this is the final number you arrived at in that statement. If you have a brand new business, then your beginning retained earnings stands at $0.
Step 4: Add your business’s net income
This is where your balance sheet and income statements come in. If you had a net loss during this period, subtract it instead.
Step 5: Subtract dividends paid to shareholders
If the business is not publicly traded, then this amount should indicate the dividends paid out to the owner of the company, or to other investors.
Once you’ve subtracted dividends, you’ll have your final statement of retained earnings.
What it might look like
Let’s look at a possible example of a statement of retained earnings for one year.
If your beginning retained earnings were $100,000, and your net income for the year was $60,000, and your paid dividends were $8,000, then the formula would look like this:
$100,000 + $60,000 – $8,000 = $152,000
In this situation, your retained earnings for the year would be $152,000. You can use this amount to reinvest in new equipment, property, employees, or anything you think will contribute to the success of your business.
The information provided on this page does not, and is not intended to constitute legal or financial advice and is for general informational purposes only. The content is provided “as-is”; no representations are made that the content is error free.