The statement of retained earnings is the financial statements that report about the entity’s opening balance of retained earnings, dividend distributions, net income, and year-end balance of retained earnings at the end of the period.
This statement might also show the adjusting transactions made during the year and affect the retained earnings. This statement tied the income statement and balance sheet through net income made during the year.
The entity may not prepare this statement but they may use the statement of change in equity and balance sheet instead.
Yet, some analysts may want to use this statement as they are more detailed about retained earning then the statement of change in equity.
The above is the format of statement of retained earnings and as you can see, at the first of this statement there is the opening balance of accumulated earning that brought forward from previous year accumulated earnings.
The increment or decrement of retained earnings is depending on two important elements as you can see in the format above.
First is the net profit that the entity made during the year. And second is the dividend declared by the entity that is approved by the board of directors as well as authority.
It is important to note that we can deduct only the dividend that is declared by the entity. If the dividend is not declared yet, then the dividend should not qualified for the deduction.
The new startup company that just grows, the management team might not decide to propose to the board of directors for paying the dividend.
This is because they want to use the surpluses fund for expanding the operating, improve broth people and machine capacity.
Increase branding, and spending more in research and development is also important in this stage. These things are really important to the entity’s future growth and sustainability.
However, for the entity that has financial healthy, they might consider making dividend payments to the shareholders based on their approval.
This is part of the investment strategy that making dividend payments could retain the goods investors and attract more potential investors.
Retained earnings are the balance sheet items in the equity section. Just like equity and liabilities, it is increasing in credit and decreasing in debit.
At the time net income is the move to retained earning, we credit-earning and debit net income. This is for manual transactions.
However, for the system, earning is automatically recording to statement of retained earnings, balance sheet, and statement of change in equity.
As you can see in the example above, the Construction Com Ltd had retained earnings amount 100,000 USD at the beginning of the year 2018.
And during the year 2018, the company make another profit of 50,000 USD. This would increase the accumulated earnings to 150,000 USD.
Yet, during the year board of directors have approved the dividend payments to shareholders amount 70,000 USD.
This will reduce year-end retained earnings to 80,000 USD at the end of 2018. Because the dividend payment is bigger than the net profit, the year-end earnings are less than the opening balance.
Let assume that the payments are the same but net profit is 100,000 USD. Then retained earnings would be 130,000 USD which is higher than opening balance.
As explained above, year-end accumulative earnings are depending on these two factors. And sometimes, it turns into negative when the entity doesn’t make profits or recently makes losses.