How to Create a Statement of Retained Earnings for a Financial Presentation

Current net income or loss is added in the middle of the model, as is the subtraction of dividends paid. If a company pays dividends to investors, and its earnings are positive for a given period, then the amount left over after those payouts is that period’s retained earnings. That balance will normally appear on a retained earnings statement versus on a cash flow statement, which reflects only the cash and cash equivalents a company actually generates and spends over a specific period. Retained earnings are the cumulative profits that remain after a company pays dividends to its shareholders. These funds may be reinvested back into the business by, for example, purchasing new equipment or paying down debt.

This is the net profit or net loss figure of the current accounting period, for which retained earnings amount is to be calculated. A net profit would lead to an increase in retained earnings, whereas a net loss would reduce the retained earnings. Thus, any item such as revenue, COGS, administrative expenses, etc that impact the Net Profit figure, certainly affects the retained earnings amount. Since cash dividends result in an outflow of cash, the cash account on the asset side of the balance sheet gets reduced by $100,000. Also, this outflow of cash would lead to a reduction in the retained earnings of the company as dividends are paid out of retained earnings.

What is an Example of Retained Earnings?

It’s also a key component in calculating a company’s book value, which many use to compare the market value of a company to its book value. Conversely, if a company has a low retained earnings percentage, it may indicate that it isn’t reinvesting enough of its profits back into the business, which could be cause for statement of retained earnings example concern. If a company has a high retained earnings percentage, it keeps more of its profits and reinvests them into the business, which indicates success. Learn the best ways to calculate, report, and explain NPV, ROI, IRR, Working Capital, Gross Margin, EPS, and 150+ more cash flow metrics and business ratios.

Like paid-in capital, retained earnings is a source of assets received by a corporation. Paid-in capital is the actual investment by the stockholders; retained earnings is the investment by the stockholders through earnings not yet withdrawn. The retained earnings balance is the cumulative, lifetime earnings
of the company less its cumulative losses and dividends. Dividends are the portion of the business’s profits that are distributed to the owners or shareholders. One way that the statement of retained earnings relates to accounting is by providing a record of the company’s net income or loss.

Statement of Retained Earnings

If this is your first statement of retained earnings, your starting balance is zero. The retention ratio (also known as the plowback ratio) is the percentage of net profits that the business owners keep in the business as retained earnings. However, even small businesses can benefit from creating a statement of retained earnings, particularly if you’re looking to expand or attract investors, or if you’re thinking about applying for a business loan.

A company’s beginning retained earnings are the first amount of retained earnings that the company has after its initial public offering (IPO). You calculate this number by subtracting a company’s total liabilities from its total assets. Some companies use their retained earnings to repurchase shares of stock from shareholders. You might go this route for various reasons, such as increasing existing shareholders’ ownership stake or reducing the number of outstanding shares.