The statement of retained earnings is the extended version of the statement of change in equity. It is normally prepared as required by the senior management team, the board of directors, or the local authority.
This statement breakdown the key information related to the entity’s earnings to readers. That information including the opening balance of retained earnings, net income during the period, the dividend paid, or declaration during the year.
It is not normally prepared with four main types of financial statements like balance sheet, income statement, statement of change in equity, and cash flow statement. However, some entity prepares it for management purposes or for investors to get easy to analyst entity’s earnings.
In this article, you will learn how to read, prepare and analyze the statement of retained earnings. You will also learn how to calculate the total balance of earnings at the end of the year.
Based on this format, the important information that you should have in order to let you able to prepare this statement is
- Opening balance retained earnings
- Net income of the current year
- Dividend declaration and payments
Calculated Net Income:
Net income is the bottom line that the entity earns during the years after deducting many lines of expenses, including the cost of goods sold, operating expenses, interest expenses, and tax expenses. You can also find it in the entity income statement. Net income will use to add to the earnings statement. You can see the template above.
Opening Balance Retained Earnings:
To calculate current year retained earnings, you need to know the opening balance earnings. The earnings that are carrying forward from the previous year’s earnings.
You can find it in the previous year’s balance sheet, statement of change in equity, or statement of retained earnings. The opening balance will use for adding with the current net income above.
Here is the dividend that the entity declared or paid to the shareholders during the year. If the entity is not declared dividend payment officially, we can’t deduct it in the calculation. And accounting records could not record this into the accounting system. The entity may disclose it in the audit report or financial statements.
The dividend will deduct in the calculation and it will reduce the retained earnings.
Prepare the Statement:
Once you have all the information on hand, you can now prepare the retained earnings statement by incorporating the information above into the template.
Making sure that opening retained earnings, net income, and dividend payments are correctly input. And review the formula to confirm the correctness of a calculation.
Cross-check the calculation:
You can do some quick checks to ensure that your retained earnings statement is correctly prepared. As you know, retained earnings are reporting in many different reports.
For example, balance sheet and statement of change in equity. Once you complete your calculation, you can cross-check with this.