Main Content
Lesson 1: Introduction to Accounting and Business
Statement of Retained Earnings
A statement of retained earnings shows the summary of changes in profits reinvested in the business instead of distributed to owners as dividends in a given time period (for example, a month, a quarter, or a year). Retained earnings is determined as follows:
beginning retained earnings (the amount of profits left in the business at the end of the last period)
+ net income (revenue minus expenses amount from the current income statement)
- net loss (revenues minus expenses amount from the current income statement)
- dividends (profits paid to owners)
ending retained earnings
Let's examine what this really means. If this is the first period of operations, there will not be any beginning retained earnings. If the company has been in business and has left prior period earnings in the company (not distributed to owners), then that is the starting place. To that we add any current period profits, which are determined using the income statement (revenues minus expenses). However, if any profits are distributed to owners (dividends), those profits must be subtracted, because that amount is not being "retained" in the company. The result is the retained earnings that will become part of the owner’s equity.
Example 1.10
MM TAX started business in December 20XX. On December 31, MM TAX is completing its financial statements. Using the income statement that was just completed, we can complete the statement of retained earnings. MM TAX has a beginning balance of $0 and a net income of $2,300 from the income statement. MM TAX also paid $200 in dividends during the period.
The statement of retained earnings for MM TAX is shown below:
| Beginning retained earnings |
-
| $0 |
|---|---|---|
| Add: net income for month | +$2,300 |
-
|
| Less: dividends | -$200 |
-
|
| Increase in retained earnings |
-
| $2,100 |
| Ending retained earnings* |
-
| $2,100 |
