A statement of retained earnings details how much of a company’s earnings were kept within a given time period, and is used to track fluctuations in retained earnings. It shows the current equity of a company and is important for tax purposes.
A statement of retained earnings is an accounting term used to describe a specific type of balance sheet. The retained earnings statement details how much of its earnings a company retained within a given time period. The amount of retained earnings differs from period to period and this statement shows those differences. It may be a separate balance sheet included in accounting information provided to investors and the IRS, or it may be listed on other balance sheets when accounting is completed.
When a business generates revenue, that revenue is called profit. Expenses are subtracted from earnings to determine the net income or profits a business actually earns. All this is recorded on a balance sheet.
The money that a company receives is then used in many different ways. Some are paid to employees. In a publicly traded company, some may be shared with investors in the form of dividends or cash payments to investors who own stock. Part of this is also maintained by the company.
Cash held by the company is listed as retained earnings. The amount of earnings a company keeps varies from period to period. One month, for example, a company can keep a good part of its earnings if it has low expenses, low payroll or does not distribute dividends. In the coming period, the company may keep little of its earnings. This causes the retained earnings the company needs to change or fluctuate.
Fluctuations in retained earnings are tracked in the statement of retained earnings. The statement must generally be prepared in a specific manner, in accordance with generally accepted accounting principles (GAAP). Under GAAP principles, the statement is normally prepared by transferring numbers from other financial documents and balance sheets. For example, net income statements can be used to generate the starting number in the statement of retained earnings from which expenses are subtracted.
The statement of retained earnings shows the current equity of a company. In a publicly traded company, the statement therefore demonstrates how much equity or how much cash the shareholders have as a result of their ownership interest in the company. In a closely held company, the balance of retained earnings in this statement is referred to as owner’s equity. This can be important for tax purposes.
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