A statement of retained earnings is an accounting term used to describe a specific type of balance sheet. The statement of retained earnings details how much of its earnings a company has retained within a given period of time. The amount of retained earnings differs from period to period and this statement shows those differences. It can be either a separate balance sheet included with accounting information provided to investors and the IRS, or it can be listed on other balance sheets when accounting is completed.
When a company generates income, that income is referred to as earnings. Expenses are subtracted from earnings to determine the net earnings, or the profits a company actually makes. This is all recorded on a balance sheet.
The money a company brings in is then used in a number of different ways. Some is paid out to employees. In a publicly held company, some may be shared with investors in the form of dividends, or cash payouts to investors who own shares of stock. Some of it is also kept by the company.
The money kept by the company is listed as retained earnings. The amount of earnings a company keeps varies from period to period. One month, for example, a company may keep much of its earnings if it has low expenses, low payroll or does not distribute a dividend. In the next period, the company may keep little of its earnings. This causes the retained earnings the company has to change, or fluctuate.
The fluctuations in retained earnings are tracked on the statement of retained earnings. The statement must generally be prepared in a specific manner, according to generally accepted accounting principles (GAAP). According to GAAP principles, the statement is normally prepared by transferring numbers from other financial documents and balance sheets. For example, net income statements can be used to generate the starting number on the statement of retained earnings, which expenses are then subtracted from.
The statement of retained earnings demonstrates the current equity a company has. In a publicly held company, the statement thus demonstrates how much shareholder equity there is, or how much cash the shareholders own as a result of their ownership stake in the company. In a privately held company, the balance of retained earnings on this statement is referred to as owner's equity. This can be important for tax purposes.