Preparing a Statement of Retained Earnings

The Statement of Retained Earnings, or Statement of Owner's Equity, is an important part of your accounting process. Retained earnings represent the amount of net income or profit left in the company after dividends are paid out to stockholders. The company can then reinvest this income into the firm. 

The statement of retained earnings can be prepared as its own, standalone schedule, but many companies also append it to the bottom of another statement, such as the balance sheet. 

This schedule is most often prepared for outside parties, such as lenders or investors since internal staff usually has access to this information.

Follow this preparation process for a Statement of Retained Earnings.

01
Prepare the Heading for the Statement of Retained Earnings

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A Statement of Retained Earnings should have a three-line header to identify it. On ​the first line, put the name of the company. The second line simply says, "Statement of Retained Earnings." 

The third line should present the schedule's preparation date as "For the Year Ended XXXXX." For the word "year," any accounting time period can be entered, such as quarter or month.

02
State the Retained Earnings Balance From the Prior Year

The first item on the Statement of Retained Earnings should be the balance of retained earnings you're carrying over from the prior year. the comes from the prior year's balance sheet.

If the balance of retained earnings for a hypothetical firm were $20,000, the first line for the Statement of Retained Earnings would look like this:

Retained Earnings, December 31, 2017 $20,000

03
Add Net Income From the Income Statement

The second item entered is Net Income or Loss. If the same hypothetical company had a net income of $10,000, the retained earnings statement now looks like this:

  • Retained Earnings:December 31, 2017 $20,000
  • Plus: Net Income 2018 +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.

04
Subtract Dividends That Your Company Pays Out to Investors

If our hypothetical company pays dividends, subtract the number of dividends it pays out of Net Income. If it does not, then subtract $0. If the company's dividend policy is to pay 50 percent of its net income out to its investors, $5,000 would be paid out as dividends and subtracted from the current total.

  • Retained Earnings, December 31, 2017 $20,000
  • Plus: Net Income 2018 +10,000
  • Total $30,000
  • Minus: Dividends (5,000)

Dividends are treated as a debit, or reduction, in the retained earnings account whether they've been paid or not. If, for instance, Widget Corporation's board of directors declares 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. 

05
Prepare the Final Total for Retained Earnings for 2018

Subtract the dividends, if paid, and then calculate a total for the Statement of Retained Earnings. This is the amount of retained earnings that is posted to the retained earnings account on the 2018 balance sheet.

  • Retained Earnings, December 31, 2017 $20,000
  • Plus: Net Income 2018 $10,000
  • Total: $30,000
  • Minus: Dividends Paid ($5,000)
  • Retained Earnings, December 31, 2018 $25,000

This completes the Statement of Retained Earnings.

06
Additional Information

Although preparing the 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 as a deeper level of detail.  

A Cautionary Word About Compliance

When filling out any financial statements, always check with your accountant or your business's financial planner to make sure you are in compliance with the most updated formats and generally accepted accounting principles.