Statement of Retained Earnings

The amount of net income which is left in a business after the distribution dividends or withdrawls by owner is called retained earnings. It is calculated as shown in the following formula:

Retained Earnings
= Beginning Retained Earnings
+ Net Income
− Withdrawals by Owners

The financial statement which calculates the balance of retained earnings at the end of the period is called the statement of retained earnings. It is very similar to the statement of changes in equity however it only shows how retained earnings changed during the period. As obvious from the above formula, the basic elements of a statement of retained earnings are:

  1. Beginning balance of retained earnings
  2. Corrections for prior errors along with the related tax effect
  3. Net income
  4. Dividends or withdrawals by the owner(s) if any

When dividends are declared in a period, they must be deducted in the statement of retained earnings of that period. It does not matter whether the payment of dividend has been made or not.

Example and Format

The following example shows the format of a statement of retained earnings:

Company A
Statement of Retained Earnings
For the year ended Dec 31, 2011
 
Beginning Retained Earnings$32,100
Correction of Error in Telephone Expense−$1,000 
Tax Effect @30%300 
Net Correction−700
Adjusted Beginning Balance$31,400
+ Net Income44,950
− Dividends Declared−7,200
Ending Retained Earnings$69,150

Written by Irfanullah Jan