Statement of Retained Earnings

Statement of Retained Earnings — Overview

A statement of retained earnings (also called a retained earnings statement, statement of owner’s/shareholders’ equity, or equity statement) shows how a company’s retained earnings changed over a specified period. It reconciles beginning and ending retained earnings using information such as net income and dividends. The statement may appear separately or be included in the balance sheet or statement of shareholders’ equity.

What the statement includes

Typical items shown:
* Beginning retained earnings (from prior period)
* Net income or net loss for the period
* Dividends paid (cash and stock dividends)
* Prior-period adjustments (corrections, accounting changes)
* Ending retained earnings (calculated balance)

Purpose and uses

The statement explains how corporate profits were used—either reinvested in the business, used to pay debt, distributed to shareholders, or held as reserves. Investors and analysts use it to:
* Assess how a company funds growth (reinvestment vs. distributions)
* Evaluate the company’s dividend policy and sustainability
* Understand changes in shareholders’ equity over time

Common uses of retained earnings:
* Reinvesting in operations or R&D
* Funding acquisitions or partnerships
* Repaying debt
* Repurchasing shares
* Building cash reserves

How to calculate retained earnings

Basic formula:
Ending Retained Earnings = Beginning Retained Earnings + Net Income (or − Net Loss) − Dividends ± Adjustments

Example:
* Beginning RE = $100,000
Net income = $30,000
Dividends = $10,000
* Ending RE = $100,000 + $30,000 − $10,000 = $120,000

Retention ratio (plowback ratio)

The retention ratio measures the share of net income retained in the business:
* Retention ratio = (Net Income − Dividends) / Net Income = 1 − Payout Ratio

Interpretation:
* High retention ratio — more earnings reinvested for growth (common for younger or capital-intensive firms)
* Low retention ratio — more earnings returned to shareholders (common for mature firms)
* Very high retention without productive use can signal capital inefficiency

How it differs from the income statement

• Income statement: reports revenues, expenses, gains, and losses over a period to compute net income.
• Statement of retained earnings: starts with prior retained earnings and adjusts for net income and distributions to show how retained equity changed.

Are dividends paid out of retained earnings?

Dividends are paid from a company’s profits. When preparing retained earnings, dividends reduce retained earnings. In effect, paying dividends lowers the retained earnings balance.

Benefits of presenting a retained earnings statement

• Enhances transparency about profit utilization
• Helps investors judge reinvestment strategy and dividend policy
• Provides context for balance sheet equity changes
• Useful when comparing companies with different capital needs (e.g., tech vs. commodity businesses)

Key takeaways

• The statement of retained earnings reconciles beginning and ending retained earnings by reflecting net income, dividends, and adjustments.
• It reveals how a company deploys profits—reinvesting for growth, paying dividends, repurchasing shares, or reducing debt.
• The retention ratio derived from the statement helps investors assess reinvestment levels versus shareholder payouts.