Definition: The statement of retained earnings is a financial report that shows the changes in the retained earnings account over a period of time. In other words, it’s a financial statement that reports the transactions that increase or decrease retained earnings over the course of an accounting period.
What Does Statement of Retained Earnings Mean?
The statement of retained earnings is a short report because there aren’t very many business events that change the balance in the RE account. The report typically lists the net income or loss for the period, dividends paid to shareholders in the period, and any prior period adjustments that occurred.
The statement of retained earnings equation looks like this.
-
- Beginning RE balance
-
- Plus:
- Net income
- Plus:
-
- Less:
- Net loss
- Dividends
- Less:
-
- Plus / Less:
- Prior period adjustments
- Plus / Less:
- Ending RE balance
The ending RE account balance is always carried forward to the following year becoming the new year’s beginning balance. Obviously, the first year of a business will not have a beginning RE balance.
Let’s take a look at an example.
Example
Mark’s Ping Pong Palace is a table tennis sports retail shop in downtown Santa Barbara that was incorporated this year with Mark’s initial stock purchase of $15,000. During the year, the company made a profit of $20,000 and Mark decided to take $15,000 dividend from the company. The statement of retained earnings would calculate an ending RE balance of $5,000 (0 + $20,000 – $15,000). Notice that the initial investment in stock isn’t taken into consideration.
The stock purchase is not part of RE since it represents Mark’s ownership share in the corporation. Instead, these changes would be recorded in the common stock account and reported on the statement of stockholder’s equity. This ending RE balance of $5,000 will be carried forward to the following year as the future year’s beginning RE balance.
I did not include a prior period adjustment in this example because they aren’t typically very common. Prior adjustments imply that something was done incorrectly, reports were misstated, or an error occurred. None of these should be frequent.
