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What is a Statement of Retained Earnings?

Statement of Retained Earnings

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Statement of Retained Earnings

A Statement of Retained Earnings, often simply referred to as the “Retained Earnings Statement,” provides a detailed account of the changes in retained earnings over a specific period. Retained earnings represent the cumulative amount of net income that a company has kept, rather than distributed as dividends to its shareholders. This statement helps bridge the Income Statement and the Balance Sheet.

The basic formula for the Statement of Retained Earnings is:

Ending Retained Earnings = Beginning Retained Earnings + Net Income (or Loss) − Dividends Declared

Here’s a basic outline of the statement:

  • Beginning Retained Earnings: This is the retained earnings balance at the start of the period, which would be the end balance from the previous period.
  • Add: Net Income (or subtract Net Loss): The profit (or loss) for the period, typically taken from the Income Statement.
  • Less: Dividends Declared: The amount of dividends declared by the company during the period.
  • Ending Retained Earnings: The final retained earnings amount that will be reported on the Balance Sheet for the end of the period.

Example of a Statement of Retained Earnings

Let’s imagine a scenario where the Statement of Retained Earnings is slightly more complex due to additional equity-related activities. For context, let’s assume that the company had a stock split during the year and issued a stock dividend.

ABC Corporation: Statement of Retained Earnings For the Year Ended December 31, 2023

DescriptionAmount
Beginning Retained Earnings, January 1, 2023$80,000
Adjustment for 2-for-1 stock split($40,000)
Adjusted Beginning Retained Earnings$40,000
Add: Net Income for 2023$25,000
Less: Stock Dividends Issued$5,000
Less: Cash Dividends Declared$10,000
Ending Retained Earnings, December 31, 2023$50,000

Here’s a breakdown of the statement:

  • Beginning Retained Earnings: ABC Corporation started the year with a retained earnings balance of $80,000.
  • Adjustment for 2-for-1 stock split: A stock split doesn’t change the overall equity of the company, but it does require an adjustment to retained earnings to maintain the equity balance. The stock split halved the par value of the stock, effectively reducing the retained earnings by $40,000 but increasing the additional paid-in capital by the same amount.
  • Adjusted Beginning Retained Earnings: After accounting for the stock split, the adjusted beginning retained earnings is $40,000.
  • Net Income: Over the course of the year, the company earned a net income of $25,000.
  • Stock Dividends Issued: Unlike cash dividends, stock dividends involve issuing additional shares to current shareholders, which transfers a portion of retained earnings to common stock.
  • Cash Dividends Declared: ABC Corporation declared and paid cash dividends totaling $10,000 during the year.

By the end of the year, after all these events and activities, the ending retained earnings for ABC Corporation stood at $50,000.

This example demonstrates how various corporate actions can impact the retained earnings of a company, requiring adjustments on the Statement of Retained Earnings.

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