Preparing a Statement of Retained Earnings

The Statement of Retained Earnings is one of the important financial statements that should be prepared during the accounting cycle. Retained earnings represent the amount of net income or profit left in the company after dividends are paid out to stockholders. The company reinvests this income into the firm's business operations for various projects. 

The statement is structured as an equation, starting with the retained earnings balance at the beginning of the accounting period. This could be a monthly, quarterly or annual figure. Net income for the period is added in, and any paid dividends are subtracted out, leaving an ending balance that represents the company's beginning retained earnings figure for the next accounting period.

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 already has access to this information or doesn't need it in the ordinary course of business operations.

The following walks through the 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.

Say that the balance of retained earnings for a hypothetical firm is $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 Statement of Retained Earnings should be the second financial statement prepared. The Income Statement is the first. Say that net income from the hypothetical company is $10,000. That is the first item added to the Statement of Retained Earnings. 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

Does your company pay dividends? If it does, subtract the amount of dividends your company pays out of net income. If it does not, then subtract $0. 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, 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 Corp'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 out the dividends, if you pay dividends, and then calculate a total for the Statement of Retained Earnings. This is the amount of retained earnings that you post to the retained earnings account on your new 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 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.

Paid-in capital can also be broken out 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 formats and accounting principles.