The statement of retained earnings is a short financial statement that reconciles a corporation's retained earnings at the beginning of a period with the balance at the end. It shows how much of the period's profit was kept in the business and how much was distributed to shareholders as dividends, along with any corrections of errors from earlier periods. It is sometimes called the retained earnings statement or the statement of changes in retained earnings.
The statement links the income statement and the balance sheet. Net income from the income statement flows into it, and its ending balance becomes the retained earnings figure reported within stockholders' equity on the balance sheet. For this reason it is usually prepared after the income statement and before the balance sheet.
Format
A typical statement follows this sequence:
- Retained earnings at the beginning of the period, as previously reported.
- Plus or minus any prior period adjustment for the correction of an error, net of tax, and the cumulative effect of certain changes in accounting principle, giving the adjusted opening balance.
- Plus net income, or minus net loss, for the period.
- Minus dividends declared, separately for preferred and common stock, including cash, stock and property dividends.
- Retained earnings at the end of the period.
The core relationship is:
Here adjusted beginning retained earnings is the opening balance after any restatements, net income is the period's profit after tax, and dividends declared are those approved by the board during the period, whether or not paid.
Worked example
Harbor Supplies Inc. reported retained earnings of $860,000 at 31 December 2025. In 2026 it discovers that depreciation of $40,000 was omitted in 2025; after tax at 21 percent, the correction reduces retained earnings by $31,600. Net income for 2026 is $295,000. The board declares preferred dividends of $15,000 and common dividends of $120,000.
| Harbor Supplies Inc., statement of retained earnings, year ended 31 December 2026 | Amount |
|---|---|
| Retained earnings, 1 January 2026, as previously reported | $860,000 |
| Less correction of prior year depreciation error, net of tax | ($31,600) |
| Retained earnings, 1 January 2026, as adjusted | $828,400 |
| Add net income | $295,000 |
| Less preferred dividends declared | ($15,000) |
| Less common dividends declared | ($120,000) |
| Retained earnings, 31 December 2026 | $988,400 |
The $988,400 appears on the balance sheet. The $135,000 of dividends, if still unpaid at year end, also appears as dividends payable among current liabilities.
Relationship with other statements and standards
Under US GAAP, companies must disclose changes in each component of equity, but they may do so in a separate statement of retained earnings, in a full statement of stockholders' equity, or in the notes. Public companies almost always present a statement of stockholders' equity, which includes retained earnings as one column alongside common stock, paid-in capital, treasury stock and accumulated other comprehensive income, so a separate retained earnings statement is mostly used by smaller private companies and in teaching. Under IFRS, IAS 1 requires a statement of changes in equity, which serves the same purpose.
The statement also records any appropriations, such as transfers to appropriated retained earnings, and it shows when a company has moved into an accumulated deficit. Readers use it to see a company's dividend policy at a glance: in the example, the company paid out about 46 percent of its net income. It is one of the basic financial statements students learn when studying the accounting cycle.