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What is a Statement of Retained Earnings?
The Statement of Retained Earnings is a financial statement that outlines the changes in a company’s retained earnings over a specific period, usually a fiscal year. Retained earnings are a critical component of a company’s equity and represent the cumulative profits or net income that the company has earned and retained since its inception, minus any dividends paid to shareholders. The purpose of the Statement of Retained Earnings is to show stakeholders how the retained earnings account has changed during the reporting period. This statement is especially useful for investors, creditors, and analysts who want to understand how a company is utilizing its earnings—whether reinvesting them into the business or distributing them to shareholders.
The typical structure of a Statement of Retained Earnings components:
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Beginning Retained Earnings: This is the balance of retained earnings at the beginning of the reporting period. It’s carried over from the previous fiscal year.
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Net Income or Net Loss: The net income or net loss for the current fiscal year. Net income is calculated by subtracting total expenses from total revenue.
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Dividends Declared: The dividends paid to shareholders during the fiscal year. Dividends are the portion of earnings distributed to the company’s owners.
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Other Adjustments: Any other adjustments that impact the retained earnings account, such as corrections of errors from previous periods.
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Ending Retained Earnings: This is the final balance of retained earnings at the end of the reporting period. It’s calculated by adding net income (or subtracting net loss) to the beginning retained earnings and then subtracting dividends and other adjustments.
The formula to calculate the ending retained earnings balance is:
Ending Retained Earnings = Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends – Other Adjustments
The Statement of Retained Earnings is an essential component of a company’s financial statements, along with the Income Statement, Balance Sheet, and Cash Flow Statement. These statements collectively provide insights into a company’s financial performance, position, and how it manages its earnings.
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