What is a statement of retained earnings?
A statement of retained earnings is a financial document that includes the company’s retained earnings over a period of time.
Retained earnings are calculated from your company’s net profit. Read more on our blog: ‘Keeping track of your profits with accounting & invoicing software’.
Retained earnings are any remaining profit after accounting for dividend payments to shareholders and any other payments to investors.
The retained earnings are usually kept by a business in order to invest in future projects. The statement is intended to show how a business will use these profits for future growth.
What is the purpose of a statement of retained earnings
The statement of retained earnings can either be created as a standalone document or as an addition to another financial statement such as the balance sheet.
The main goal of the statement is to find the retention ratio and the payout ratio. The retention ratio is the amount of profit kept by the business for future projects. The payout ratio is the opposite - the amount paid out to shareholders.
Newer companies generally don’t pay dividends to the shareholders as it needs the money for the growth of the company. Already established businesses usually do pay dividends as it will have enough profit for growth projects as well as the shareholders.
The purpose of the statement is to see how a company is distributing their profit.
How to create a statement of retained earnings
Creating a statement of retained earnings can be quite simple if you already have your balance sheet and profit & loss statement. The statement should include the following:
- Your business name and the title “Statement of retained earnings”
- The retained earnings balance from the previous year
- The net income or loss from the current period
- The amount paid as dividends
- The amount of retained earnings
Example of a statement of retained earnings
Using the points above, here is an example of what would be included on the statement:
- Retained earnings from December 31 2019: £40,000
- Plus net income from 2020: £30,000
- Total: £70,000
- Minus shareholder dividends: £10,000
- Retained earnings December 31 2020: £60,000
From this data, you can calculate the retention ratio (how much profit is retained by the business) by dividing the retained earnings by the net income. The payout ratio is calculated by dividing the dividends paid by the net income.
Benefits of a statement of retained earnings
The main benefit of using a statement of retained earnings is to give investors confidence in how you are distributing your business profit. If the business pays out all of the profit as dividends, then the business may not be sustainable long-term as no money is being invested in the growth of the business.
Statement of retained earnings and invoicing software
Invoicing software not only helps you create and send professional invoices, but it also helps you create your important accounting reports.
With Debitoor, your balance sheet and profit & loss statement will automatically update every time you create an invoice, record an expense, or add a payment. You can also easily add dividends payments as an expense on your account.
From there, you will be able to easily create a statement of retained earnings from the data on your reports. Feel free to give it a try with a 7-day trial.
