Which transactions affect the retained earnings statement?

By Chizoba Morah AAA
A:

Retained earnings are the portion of a company's income that management retains for internal operations instead of paying it to owners in form of dividends. The statement of retained earnings, a basic financial statement under generally accepted accounting principles (GAAP) rules, explains changes in retained earnings over the reporting period - usually the fiscal year. Retained earnings are calculated by adding net income and subtracting dividends from the balance of retained earnings at the beginning of the period.

For example: If you had $5000 when the reporting period started and at the end of the period you realized $4000 in net income and paid out $2000 in dividends, your retained earnings at the end of the period will be:

Retained Earnings = Beginning Balance + Net Income – Dividends

Retained Earnings = $5000 + $4000 - $2000 = $7000.

Essentially, the statement of retained earnings is affected by any transaction that affects net income and dividends. So, when total dividends paid out is increased or decreased, there is a definite effect on the statement of retained earnings. Anything that affects net income, also affects the statement of retained earnings. Some transactions that affect net income include those that increase or decrease in revenue, cost of goods sold and expenses.

Be investment-savvy and learn how to analyze this often overlooked information: Evaluating Retained Earnings: What Gets Kept Counts.

This question was answered by Chizoba Morah.

RELATED FAQS

  1. What is the difference between technical analysis and fundamental analysis?

    Learn about technical analysis and fundamental analysis, the difference between the two methodologies and how they are used ...
  2. How is reconciliation treated under generally accepted accounting principles (GAAP)?

    Read about some of the different treatments of reconciliation under GAAP, particularly with respect to IFRS accounting or ...
  3. Where did the concept of reconciliation in accounting come from?

    Learn about the history of account reconciliation, double-entry bookkeeping and the rise of modern accounting practices in ...
  4. Are all fixed costs considered sunk costs?

    Find out why all sunk costs are considered fixed, but not all fixed costs are considered sunk; see why variable costs become ...
RELATED TERMS
  1. Convention Statement

    A document filed by an insurance or reinsurance company that ...
  2. Capital Expenditure (CAPEX)

    Funds used by a company to acquire or upgrade physical assets ...
  3. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  4. Accident Year Experience

    Premiums earned and losses incurred during a specific period ...
  5. Earned Premium

    The amount of total premiums collected by an insurance company ...
  6. Insurance Regulatory Information System (IRIS)

    A collection of databases and tools used to analyze the financial ...

You May Also Like

Related Articles
  1. Budgeting

    Quickbooks vs. Quicken

  2. Fundamental Analysis

    The Best 5 Online Accounting Systems ...

  3. Investing Basics

    How To Calculate Goodwill

  4. Fundamental Analysis

    Reviewing Liabilities On The Balance ...

  5. Professionals

    Internships: Find The Best One For You

Trading Center