What is a Statement of Retained Earnings
The statement of retained earnings is a financial statement that outlines the changes in retained earnings for a specified period. The statement reconciles the beginning and ending retained earnings for the period, using information such as net income from the other financial statements. It is prepared in accordance with generally accepted accounting principles (GAAP).
The statement of retained earnings is also known as a statement of owner's equity, an equity statement, or a statement of shareholders' equity.
BREAKING DOWN Statement of Retained Earnings
This statement of retained earnings can appear as a separate statement or as an inclusion on either a balance sheet or an income statement. The statement is a financial document that includes information regarding a firm’s retained earnings, along with the net income that was distributed to stockholders in the form of dividends. An organization’s net income is typically noted, showing the amount that will be set aside to handle certain obligations outside of shareholder dividend payments, as well as any amount directed to cover any losses. Each statement covers a specified time period, as noted on the statement.
Retained earnings refer to any profits made by an organization that it keeps for internal use. These funds may also be referred to as retained profit, accumulated earnings, or accumulated retained earnings. Often, these retained funds are used to make payment on any debt obligations, or are reinvested into the company to promote growth and development.
Purpose of a Statement of Retained Earnings
The purpose of releasing a statement of retained earnings is to improve market and investor confidence in the organization. It is used as a marker to help analyze the health of a firm. Retained earnings do not represent surplus funds. Instead, the retained earnings are redirected, often as a reinvestment within the organization.
The retained earnings for a capital-intensive industry or a company in a growth period will generally be higher than some less-intensive or stable companies. This is due to the larger amount being redirected toward asset development. For example, a technology-based business may have higher asset development demands than a simple t-shirt manufacturer, as a result of the differences in the emphasis on new product development. While a t-shirt can remain essentially unchanged for a long period of time, a computer or smartphone requires more regular advancement to stay competitive within the market. Hence, the technology company will likely have higher retained earnings than the t-shirt manufacturer.