Statement of Retained Earnings- How to Prepare it

By: First Union | Date:

business-financeresources

Statement of Retained Earnings- How to Prepare it

See Your Loan Options

Get Started

A statement of retained earnings is a relatively short financial statement showing how much a company has left after paying its shareholder. Though short, it is one that every company does need to prepare. The retained earnings statement shows the change in retained earnings for that particular reporting period. As noted, retained earnings represent the money left over after shareholders get paid, so essentially the company's profit for the period. In this article, we look at how a company goes about preparing a retained earnings statements and consequently why it is useful to do so.

Understanding Retained Earnings

When there are retained earnings—again this is after shareholders get paid their dividends, the company can reinvest this money back into the business or potentially split the profit. A company will often publish their retained earnings statement as this is invaluable information for investors and also for lenders.

So the income that the company has made and then subsequently kept versus paying out to shareholders represents retained earnings. This number can be found at the bottom of a balance sheet within the shareholders' equity section most often. It can also be published, as previously mentioned, as its reportstatement.

Retained earnings will not apply to sole proprietorships—this is solely for corporations that have shareholders. A sole proprietor can generate a statement of owner's equity.

Calculating Retained Earnings

The formula for calculating your retained earnings is relatively simple. You will add the last period's retained earnings to net income (or loss if that's the case/) and then subtract dividends paid out. So it will look like the following:

Retained Earnings = Beginning Period Retained Earnings + Net Income (or Loss/) – Cash Dividends – Stock Dividends

If there are no previous retained earnings, whatever the reason, then you would begin with zero. Your net income will be taken from a specific income statement (sometimes referred to as a profit and loss statement/). The dividends paid out—be it cash or stock—can be located on your balance sheet. Keep in mind, your final number as far as retained earnings go maybe a negative number. If the reporting period's loss is larger than the previous retained earnings, you will be left with a negative outcome.

Using Retained Earnings

Companies can opt to use retained earnings in a couple of different ways. Many will reinvest the money back into the company—this could be for expansion projects perhaps, or even if they just need it as working capital. Some other ways that companies utilize their retained earnings:

  • New product line: If they are looking to expand on their current offerings, using retained earnings toward a new product line could be a smart move.
  • Expansion: As mentioned, expansion is also a way to invest those retained earnings. Maybe it means hiring on staff, or potentially such an expansion project could involve building out an office space.
  • Pay off debts: Debt repayment is yet another good way to utilize any retained earnings and thereby help the business get ahead a bit.

Preparing the Statement of Retained Earnings

Again, this will either be its document, or additionally, it is added to a balance sheet under the shareholder's equity section. This will generally be prepared quarterly, yearly, or both.

The statement will start with the retained earnings reported at the beginning of the period—or those from the last period. It will then go on to include any adjustments resulting from net income changes as well as listing out cash and stock dividends paid. The final balance represents the retained earnings for that reporting period. To prepare this statement you do need to have an updated income statement as well as a balance sheet.

The very first line again will be the previous retained earnings. However, if you have not yet done a retained earnings statement or for whatever reason do not have a previous statement, you will start with zero. So for example, if your previous period's retained earnings were 8500.00, then the first line reads: Beginning Retained Earnings Balance: 8500.00.

You will then refer to your income statement to get the net income—again, this could potentially be a net loss as well. So the next line, as an example, may show Net Income: 9000.00.

After figuring out how much you paid out in dividends for that period, you will subtract this from net income. If you paid no dividends, then this number would simply be zero. Such might read as follows: Dividends: 3500.00.

The number you arrive at once completing all the above steps represents the retained earnings. In the case of the above examples, the resulting retained earnings would be 14000.00.

Why Do You Need a Statement of Retained Earnings

So why exactly might you want to go ahead and prepare a retained earnings statement? For one, lenders are likely going to want to take a look at it should you require funding. This statement is a good indicator of whether or not you will be able to repay a business loan. If you have no retained earnings or are in the negative for consecutive periods, this could be a red flag for lending institutions.

Additionally, this is a good document to provide to your investors. They like to see rising share prices to determine if they are getting a return on their investment. Many investors will keep track of retained earnings over numerous reporting periods and thereby gain a clearer picture of future payments as well as share prices.

First Union Lending wants to help. We have been working with small business owners through this difficult time. We get companies the money they need when they need it. Our programs are fast and flexible and are custom-tailored to meet your specific needs. No one size fits all approach with us. If you require additional funds for an expansion project, to hire more staff, purchase equipment, or simply weather the storm, we can help. Call today and let's get started together!

Better Business Bureau
5 star rating
Trustpilot reviews

First Union Lending LLC is a dually licensed Lender/Broker with its main offices located at 4900 Millenia Blvd First Floor Orlando, FL 32839. First Union Lending LLC and its ads are meant for continental United States, including Alaska and Hawaii small business owners. Business Loans offered by First Union Lending LLC have varying rates and terms that can range from 30 - 120 payments and all rates and terms are based on eligibility of the business and its owners. The actual terms are based on credit, business history, industry, amount and terms. As an example, a $5,000 loan paid over 5 years at 8% would have a total repayment of $6,082.92 over the life of the loan. We use the latest encryption to protect sensitive information transmitted online, as well as run our own secure server network to ensure your information is protected offline as well.

Copyright © First Union Lending, LLC. 2021