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What is a retained earnings report and why would anyone need to look at one? This small, yet important, statement tells a story. The statement consists of four basic components. These are the previous year's ending retained earnings, the current year's net income, the current year's distribution of dividends, and the current years ending retained earnings balance. Below, we'll show you a retained earnings report along with an easy to understand explanation.
First, you might wish to download the sample statement of retained earnings found in our Media Gallery.
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Every proper financial statement begins with a title. The usual format is to show the company name, followed by the name of the statement and the year end. For example, the title on the statement might look like the following, centered at the top of the page:
My Company: Statement of Retained Earnings for Year
Ending December 31, 2009 (Millions of Dollars)
Companies that operate in the hundreds of thousands of dollars and up will typically choose to abbreviate numbers for the sake of presentation. Thus, the (Millions of Dollars) noted in the title above simply means that if is stated on a report as $512, it means $512,000,000 (512 million).
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Previous Year Earnings
The first line in the statement is last year's retained earnings balance. Simply put, it's the beginning balance of current statement, or $512 noted as follows:
Balance of Retained Earnings, December 31, 2008 $512
The $512 means $512 million.
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Current Year Net Income
The next line in the statement adds the current year's net income to the beginning balance. In earnings report this line is noted as:
Add: Net Income, 2009 21.5
21.5 means 21 million 500 thousand dollars.
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The term dividend refers to the distribution of a company's earnings to stockholders. Corporations may choose to issue a dividend or to invest the corporate earnings back into the company for growth and operating stability. Often times a corporation will choose a combination of both.
The third line in the earning report depicts the amount of dividends distributed for the current year, if any. In the sample statement the third line appears as:
Less: Dividends to common stock holders 5.5 (5 million 5 hundred thousand)
Dividends are deducted from the company's earnings because they are that portion of a company's earnings that have been distributed to the stockholders. In other words, the money was spent in the form of a distribution.
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The last line is the balance. The sample statement of retained earnings depicts this line as:
Balance of Retained Earnings, December 31, 2009 $528 (528 million)
How did we arrive at $528? The beginning balance $512 plus the current year's net income of $21.5 minus distribution of dividends in the amount of $5.5 equals the current year's earnings balance of $528.
And that's basically how easy it is in a nutshell. This earning statement applies to C corporations. For further understanding about the topic of earnings as they apply to S corporations try reading Calculating S Corp Retained Earnings.
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Image Credit (Free Digital Photos)
Source: Kieso, Donald, Weygandt, Jerry & Warfield, Terry. Twelfth Edition Intermediate Accounting. John Wiley & Sons, 2007.