How to Prepare a Statement of Retained Earnings

Understanding your company’s financial performance is critical for long-term growth. An important tool in this process is the statement of retained earnings. This financial document tracks how much of your net profit is reinvested in the business rather than paid out to shareholders — these are your retained earnings. Whether you're a startup or a growing business, knowing how to prepare and interpret this statement can give you clarity on how much equity you're building over time.

In this guide, we’ll explain what a statement of retained earnings is (and where to find it), why it matters, and how to prepare one.

What is a Statement of Retained Earnings?

A statement of retained earnings outlines how an organization’s retained earnings have changed during a specific reporting period — often quarterly or annually.

This statement typically includes:

• Beginning retained earnings
• Net income or loss
• Dividends paid
• Ending retained earnings

Why is a Retained Earnings Statement Important?

The statement of retained earnings offers valuable insight into a company’s long-term financial strategy and operational efficiency. Here’s why it matters:

• Assesses profitability over time: It shows whether the company is generating profits and retaining them for reinvestment.
• Supports funding decisions: Investors and lenders often review retained earnings to assess financial health and stability.
• Complements other financial statements: It ties into both the income statement (by reflecting net income) and the balance sheet (by updating the retained earnings line item).

How to Prepare a Statement of Retained Earnings

Creating a retained earnings statement involves a few key steps. You’ll need your financial records for the reporting period, especially your net income and any dividends issued.

1. Start with Beginning Retained Earnings

This is the retained earnings balance from the end of the previous period. You’ll typically find this on your prior period’s balance sheet.

2. Add Net Income or Subtract Net Loss

Net income comes from the current period’s income statement. If your business posted a loss, this will decrease retained earnings.

3. Subtract Dividends Paid

Any dividends distributed to shareholders reduce the retained earnings balance.

4. Calculate the Ending Retained Earnings

Use the formula:

Ending Retained Earnings = Beginning Retained Earnings + Net Income – Dividends

Retained Earnings Statement Example

Below is a simplified example of a retained earnings statement for a single quarter.

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Tips for Maintaining Accurate Retained Earnings Statements

Keeping your financial records organized and up to date is key to producing reliable retained earnings statements. Here are a few best practices:

• Automate accounting tasks: Use accounting software or AP automation platforms like Flex to streamline tracking and reporting.
• Close your books consistently: Ensure you're consistently closing out each accounting period to maintain accurate beginning balances.
• Reconcile dividend payments: Keep detailed records of any distributions to avoid discrepancies.
• Connect to your balance sheet: The ending retained earnings from your statement should match the retained earnings line on your balance sheet.

How to Find Retained Earnings on the Balance Sheet

On a typical balance sheet, retained earnings are listed under the equity section, usually below common stock and additional paid-in capital. It reflects the cumulative total of retained earnings over the life of the business.

Note: If your company has incurred significant losses or issued large dividends, retained earnings can be negative. This is referred to as accumulated deficit.

Final Thoughts

The statement of retained earnings is a powerful tool for understanding your company’s reinvestment strategy and financial trajectory. Whether you're preparing for investor meetings or simply want to improve internal reporting, mastering this document is a smart step toward sustainable growth.

With tools like Flex, you can simplify financial reporting and maintain a real-time view of your company’s financial position—all while saving time and reducing errors. 

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