Everything to know about the statement of retained earnings

What is a statement of retained earnings?

Before going into the various things, we will discuss in this article, let's treat the issue of this statement. The statement of retained earnings can be defined as a critical financial document containing information about the net profit that is available in a company or a business and cannot be shared as dividends to the company's shareholders.

The money will be reinvested into the business or used to settle external debts of the business. Every business should learn to calculate and make available its statement of retained earnings if they want to stand as a brand. This is because, in the long run, other expenses would be incurred, and then money would be needed to settle all of those miscellaneous expenses.

Where is the retained earnings statement?

Retained earnings are usually found on the shareholder's equity section of the balance sheet, and this statement should be available yearly for brands that want to track their progress. It's important as shareholders' equity connects the two key financial statements (the balance sheet to the income statement)

One thing to note about this document is that it can give the company a foresight of what will happen in the near future. If the net income is low, then there is a tendency that in coming years, it might get lower.

In other words, retained earnings are an essential aspect of a business, and it should be the concern of everyone associated with that organization what goes on when retained earnings go down yearly.

What is the statement of retained earnings equation?

Retained Earnings Formula = retained earnings for the beginning of the accounting period. + Net profit or ((-) net loss) - Dividend paid to shareholders of the company. 

This might not be clear, but you will understand it better shortly.

The retained earnings for the beginning of the accounting period represent the previous year's retained earnings. For example, if you closed a particular year with retained earnings of $2000, that would be the retained earnings used during the accounting period.

If you make a higher retained income at the closing of the next sheet, you will make the addition operation, but if it is a loss, you have to subtract just so that you can know what is left for that year. 

The dividends paid are the total amount of money that was paid to shareholders/ stockholders of your business. Knowing these, you can fix the appropriate values to get the exact figure of your current retained earnings balance. 

How to calculate retained earnings?

Here's an example calculation

table of retained earnings example calculation

This shows a company's retained earnings from 5th February 2020 to 5th February 2021.

Using the retained earnings equation where retained earnings = Beginning retained earnings + net profit or (-net loss) - dividends paid to shareholders.

($) 10 000 + 5000 - 3000 = $12,000.

Therefore, the ending retained earnings balance would be $12 000.

Before this account, we can see that the business is moving forward at least. The retained earnings would be able to sort out part or all of the company's miscellaneous expenses. 

Note: there are times when the retained earnings might be negative because the net loss is greater than that of the retained earnings from the beginning of the accounting period. This could be hard for any company that finds itself in this condition.

Importance of retained earnings

It can be reinvested into the company

During business activities on a monthly or quarterly basis, there is usually an evaluation of aspects going down in infrastructure or development. At these times, there might be no funds available to pump into that area, but when the statement of retained earnings has been published, you now have access to funds that may be put into the aspect that has been recording slow progress. This would ensure that you go into the business more actively than the previous year.

Settlement of outstanding debts

Sometimes, you can use this money to settle outstanding debts, if there are any. There might be unfinished projects that you may need to complete at the end of the year. Your retained earnings might just be the lifesaver for you at that period.

Fund project launch

For industries like technology, where there are so many innovations surfacing day by day, you would need all of these improvements and also if you would be launching a new project whatsoever. A project is something big for every business, and therefore, you need more money to ensure that you carry out your project on the big side with our flaws or errors.

Sharing of dividends

Although the retained earnings equation shows that dividends must have been paid before the statement is made life, in rare cases, you may have to take a part of your retained earnings to pay stockholders dividends.

In summary

The statement of retained earnings for every business is essential, and every business should look into it critically to keep track of its progress. Having read this article, you already have a handful of information about the statement of retained earnings.

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