Statement Of Retained Earnings
The statement of retained earnings (retained earnings statement) is a financial statement that outlines the changes in retained earnings for a company over a specified period. This statement reconciles the beginning and ending retained earnings for the period, using information such as net income from the other financial statements, and is used by analysts to understand how corporate profits are utilized.
The statement of retained earnings is also known as a statement of owner's equity, an equity statement, or a statement of shareholders' equity. Boilerplate templates of the statement of retained earnings can be found online. It is prepared in accordance with generally accepted accounting principles (GAAP).
Definition: The retained earnings statement is a financial report that describes the changes in a company's retained earnings over a specified period. This report adjusts the beginning and ending retained earnings for the period, using information such as net income from other financial statements, and is used by analysts to understand how a company utilizes its profits. The retained earnings statement is also known as the statement of owner's equity, equity statement, or statement of shareholders' equity.
Origin: The concept of the retained earnings statement originated in the early 20th century, evolving with the gradual improvement of modern corporate financial management. The earliest forms of retained earnings statements appeared in the 1920s when companies began to place more emphasis on managing and disclosing shareholders' equity. As accounting standards evolved, the format and content of the retained earnings statement became more standardized.
Categories and Characteristics: The retained earnings statement mainly falls into two categories: one is a separately prepared retained earnings statement, and the other is the retained earnings section integrated into the statement of changes in shareholders' equity. A separately prepared retained earnings statement typically includes beginning retained earnings, net income or net loss, dividend distributions, other adjustments (such as changes in accounting policies or corrections of prior period errors), and ending retained earnings. The retained earnings section integrated into the statement of changes in shareholders' equity is presented alongside other equity items, providing a more comprehensive view of changes in shareholders' equity.
Specific Cases: Case 1: A company has beginning retained earnings of $1,000,000 at the start of 2023, net income of $500,000 for 2023, and distributed dividends of $200,000 during the period. The ending retained earnings for 2023 would be $1,000,000 + $500,000 - $200,000 = $1,300,000. Case 2: A company has beginning retained earnings of $2,000,000 at the start of 2023, a net loss of $300,000 for 2023, and no dividend distributions, but due to a change in accounting policy, retained earnings are adjusted down by $100,000. The ending retained earnings for 2023 would be $2,000,000 - $300,000 - $100,000 = $1,600,000.
Common Questions: 1. Why is the retained earnings statement important to investors? The retained earnings statement helps investors understand how a company utilizes its profits, whether for reinvestment or distribution to shareholders. 2. How does the retained earnings statement differ from the income statement? The income statement shows a company's revenues and expenses over a specific period, resulting in net income, while the retained earnings statement shows how net income affects the company's retained earnings.
