Statement of retained earnings definition

financial statements

You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. For example, during the period from September 2016 through September 2020, Apple Inc.’s stock price rose from around $28 to around $112 per share. The earnings can be used to repay any outstanding loan that the business may owe. It can be invested to expand existing business operations, like increasing the production capacity of the existing products or hiring more sales representatives. Nansel is a serial entrepreneur and financial expert with 7+ years as a business analyst.

Since management decides how much to pay out in dividends, they can decide to reduce or not pay them out for that period for companies focused on growth or expansion. The other three mandatory statements are the Balance Sheet, the Income Statement, and the Statement of Changes in Financial Position. Retained earnings are a type of equity and are therefore reported in the shareholders’ equity section of the balance sheet. Although retained earnings are not themselves an asset, they can be used to purchase assets such as inventory, equipment, or other investments. Therefore, a company with a large retained earnings balance may be well-positioned to purchase new assets in the future or offer increased dividend payments to its shareholders.

Accumulated Depreciation on Balance Sheet

One is the net income or loss that the company experiences in a given period. When repurchasing stock shares, be sure to understand the potential implications. In some cases, the repurchase may be seen as a sign of confidence and could increase the company’s common stock price and stockholder equity. But if done incorrectly, it can negatively impact existing shareholders’ equity sections and repel potential investors, harming your bottom line. Accountants must accurately calculate and track retained earnings because it provides insight into a company’s financial performance over time. Accurate calculations can help the company make informed business decisions and ensure that profits get reinvested to benefit the company.

  • If there was a loss for the year, the balance of the profit for the year would be negative.
  • Management and shareholders may want the company to retain the earnings for several different reasons.
  • Working Capital (Current Assets – Current Liabilities) is a liquidity ratio that measures a firm’s ability to meet current obligations.
  • As you can see, the beginning retained earnings account is zero because Paul just started the company this year.
  • By subtracting the dividends paid from the net income, you can see how much profit the company has reinvested in itself.

Any time you’re looking to attract additional investors or apply for a loan, it’s helpful to have a statement of retained earnings prepared. The statement of retained earnings summarizes any changes in retained earnings over a specific period of time.

Record the previous year’s balance.

Earnings for any reported period are either positive, indicating a profit, or negative, indicating a loss. Unless a business is operating at a loss, it generates earnings, which are also referred to as the bottom-line amount, profits or after-tax net income. Secondly, to enable shareholders and investors to evaluate the firm’s recent financial performance and prospects for future growth. This information is crucial for supporting decisions on holding, buying, or selling stock shares. For shareholders and the general public, the most accessible version is the edition in the firm’s Annual Report to Shareholders.


Paul’s net income at the end of the year increases the RE account while his dividends decrease the overall the earnings that are kept in the business. A decrease in retained earnings is not necessarily cause for alarm, as any time you invest money back into your business, your retained earnings will likely decrease.

Top 4 Real-Life Examples of Statement of Retained Earnings

The of retained earnings reconciles the beginning-of-period balance of retained earnings to the end-of-period balance. The net income or loss for the period is used to calculate the change in retained earnings. Dividends paid during the period are deducted from net income to arrive at the change in retained earnings.

  • As a result, companies that retain a large portion of their profits often see their stock prices increase over time.
  • A negative retained earnings means a company has incurred losses in previous accounting periods and has been carried over to the current accounting period.
  • That schedule contains a corkscrew type calculation because the current period opening balance equals the previous period’s closing balance.
  • This shows you how much the company has earned in the current period.
  • In an empty cell, type the equal sign to start the formula and click on the cell containing beginning retained earnings.

Understanding your company’s Retained Earnings is important because it enables you to understand how much money is available for activities like expansion or asset acquisition. You can find this number by subtracting your company’s total expenses from its total revenue for the period.

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