Statement of Retained Earnings: Format, Example & How to Prepare
Statement of Retained Earnings: Format & Example
The statement of retained earnings is a financial statement that reconciles the beginning and ending retained earnings balance for a period. It shows how net income and dividends changed retained earnings from $250,000 to $290,000 — and it connects the income statement to the balance sheet.
This guide covers what the statement of retained earnings is, its standard format, how to prepare it step-by-step, and how it relates to the other core financial statements. All examples use consistent figures: $250,000 beginning RE, $70,000 net income, $30,000 dividends, $290,000 ending RE.
Key Takeaways
- The statement of retained earnings shows changes in retained earnings over a period
- It bridges the income statement and the balance sheet
- Required under GAAP as part of a complete set of financial statements
- Format: Beginning RE + Net Income − Dividends = Ending RE
- Prior period adjustments appear before net income, adjusting the opening balance
- Example: $250,000 + $70,000 − $30,000 = $290,000
What Is the Statement of Retained Earnings?
The statement of retained earnings (also called the statement of changes in stockholders' equity in more comprehensive filings) is one of the four main financial statements. It explains the change in retained earnings between two balance sheet dates.
In simple terms: it takes last year's retained earnings, adds this year's net income, subtracts dividends, and arrives at the ending balance that appears on the current balance sheet. This statement provides transparency about how and why the retained earnings balance changed.
Who Prepares It?
All companies that prepare financial statements under GAAP are required to present a statement of retained earnings (or an equivalent statement of changes in equity). It is typically prepared annually, although companies may also issue quarterly or monthly interim versions.
What It Tells Investors
- How much of the current year's profit was retained versus distributed
- Whether retained earnings are growing, stable, or declining
- Whether any accounting errors were corrected during the period
- The dividend policy of the company (high vs. low payout)
Standard Format of the Statement of Retained Earnings
The statement follows a simple reconciliation format. Here is the standard template:
| [Company Name] Statement of Retained Earnings For the Year Ended [Date] |
|
|---|---|
| Beginning Retained Earnings, [start date] | $XXX,XXX |
| Prior Period Adjustments (if any) | ± $X,XXX |
| Adjusted Beginning Retained Earnings | $XXX,XXX |
| Add: Net Income (or Less: Net Loss) | $XX,XXX |
| Less: Dividends Declared | ($XX,XXX) |
| Ending Retained Earnings, [end date] | $XXX,XXX |
How to Prepare the Statement of Retained Earnings (Step-by-Step)
Step 1: Gather Your Source Data
You need three pieces of information:
- Beginning RE: From the prior year's balance sheet (stockholders' equity section)
- Net Income or Net Loss: From the current year's income statement (bottom line)
- Dividends: From dividend declarations during the period (board minutes or dividend register)
Step 2: Check for Prior Period Adjustments
Before entering the beginning RE, check whether any accounting errors from prior periods need correction. If so, adjust the beginning RE up or down before proceeding. Disclose the nature of the adjustment.
Step 3: Apply the Formula
Step 4: Confirm Against the Balance Sheet
The ending retained earnings on your statement must exactly match the retained earnings line in the stockholders' equity section of the balance sheet for the same date. If they don't match, you have an error to find and fix.
Step 5: Present with Proper Headers
Format the statement with the full company name, statement title, and "For the Year/Period Ended [date]" header.
Complete Worked Example: Statement of Retained Earnings
Using our standard illustrative figures:
| Eduyush Corp. Statement of Retained Earnings For the Year Ended December 31, 20XX |
|
|---|---|
| Beginning Retained Earnings, January 1, 20XX | $250,000 |
| Add: Net Income for the Year | $70,000 |
| Less: Cash Dividends Paid | ($30,000) |
| Ending Retained Earnings, December 31, 20XX | $290,000 |
This $290,000 balance will appear on the balance sheet under stockholders' equity as of December 31, 20XX. See: Retained Earnings on the Balance Sheet: Where & Why.
Including Prior Period Adjustments
A prior period adjustment is a correction for a material accounting error made in a previous period. Under ASC 250 (GAAP), these adjustments are applied retroactively — meaning the beginning retained earnings is restated, not the current period's income.
Example With Prior Period Adjustment
| Eduyush Corp. — With Error Correction Statement of Retained Earnings For the Year Ended December 31, 20XX |
|
|---|---|
| Beginning Retained Earnings (as previously reported) | $250,000 |
| Less: Prior Period Adjustment (error correction, net of tax) | ($12,000) |
| Adjusted Beginning Retained Earnings | $238,000 |
| Add: Net Income for the Year | $70,000 |
| Less: Cash Dividends Paid | ($30,000) |
| Ending Retained Earnings | $278,000 |
How the Statement of Retained Earnings Connects to Other Statements
Link to the Income Statement
The net income (or net loss) on the statement of retained earnings must match the net income figure on the income statement for the same period. This is how the two statements are tied together.
Link to the Balance Sheet
The ending retained earnings on this statement must equal the retained earnings line on the balance sheet at the end of the period. This is a key reconciliation check.
Link to the Statement of Cash Flows
Dividends paid appear as an outflow in the financing activities section of the cash flow statement — the same dividends that reduce retained earnings in this statement.
To understand the broader context, read our overview of What is a Financial Statement and see how the trial balance feeds into statement preparation.
GAAP Requirements for the Statement of Retained Earnings
Under US GAAP (ASC 505 — Equity), companies must present a statement showing all changes in equity, including retained earnings. Publicly traded companies typically present a more comprehensive Statement of Changes in Stockholders' Equity, which includes all equity accounts (common stock, APIC, retained earnings, AOCI, treasury stock).
For private companies, a standalone statement of retained earnings is often sufficient. Both formats serve the same purpose: transparency about what happened to equity during the period.
For a complete formula breakdown, see: Retained Earnings Formula Explained (With Examples).
Prepare Financial Statements Confidently with CPA Training
Preparing the statement of retained earnings — including handling prior period adjustments — is a common CPA exam task. Our Surgent CPA Review Course includes step-by-step financial statement preparation tutorials, adaptive MCQs, and full task-based simulations for the FAR section.
Related Accounting Guides
- Bad Debt Expense: Complete Guide — Learn how uncollectible accounts affect retained earnings through net income
- Goodwill Impairment: Complete Guide — Understand how impairment charges reduce net income and therefore retained earnings
- IAS 40 Investment Property Guide — Fair value gains on investment property increase net income and retained earnings under IFRS
Frequently Asked Questions
What is the statement of retained earnings?
It is a financial statement that shows how a company's retained earnings balance changed during a period. It reconciles beginning retained earnings to the ending balance by adding net income and subtracting dividends paid.
Is the statement of retained earnings required by GAAP?
Yes. GAAP requires a statement of changes in equity (of which retained earnings is the key component) as part of a complete set of financial statements. Most companies present this as a formal statement of retained earnings or a broader statement of changes in stockholders' equity.
What period does the statement of retained earnings cover?
It covers a period of time — a year, quarter, or month — not a single date. The header should read "For the Year Ended [date]" rather than "As of [date]." This is a common formatting mistake on exams.
Where does the statement of retained earnings get its numbers?
Beginning RE comes from the prior period's balance sheet. Net income comes from the current period's income statement. Dividends come from the company's dividend records or the notes to financial statements.
How does the statement of retained earnings differ from the balance sheet?
The balance sheet shows retained earnings as a single number at a point in time. The statement of retained earnings explains how that number changed over the period — it's the "story" behind the balance sheet figure.
What happens if the ending retained earnings on the statement doesn't match the balance sheet?
It signals an error somewhere — in the statement preparation, the balance sheet, or the source data. Common causes include omitted dividends, wrong net income figure, or an unrecorded prior period adjustment. Trace each number back to its source to find the discrepancy.
Can the statement of retained earnings show a deficit?
Yes. If cumulative losses exceed cumulative profits, the ending balance will be negative — called an "accumulated deficit." This is still presented in the same format but shown as a negative or in parentheses.
← Back to the main guide: Retained Earnings: Complete Guide (Definition, Formula, Examples)
About the Author
Eduyush Team — Our content is written and reviewed by accounting educators, CPA holders, and finance professionals with years of experience in financial reporting, exam preparation, and accounting education. The Eduyush Team is committed to producing accurate, exam-relevant content that helps students and professionals build real-world accounting skills.
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