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Statement of Retained Earnings Definition
The statement of retained earnings refers to the financial statement of an organization that highlights the changes that its retained earnings have in a given time period. This document does the reconciliation of retained earnings for the starting and ending period. It uses crucial insights like net income recorded in other financial statements for doing the reconciliation of data. The statement of retained earnings follows GAAP, commonly known as generally accepted accounting principles.
The statement of retained earnings has other names such as the statement of owner’s equity, statement of shareholder’s equity, or an equity statement.
A Little More on What is the Statement of Retained Earnings
The statement of retained earnings can be seen either as a standalone statement or within the balance sheet or income statement of a company. It involves crucial information about the retained earnings of a firm followed by the net income that shareholders received as dividends. The net income of a company is taken care of, and it shows the extent of money to be kept as reserves excluding dividends offered to shareholders and any amount of money aimed to recover losses. The statement of retained earnings is made for a specific time period which can also be seen on the statement itself.
Retained earnings are the company’s profits that it keeps aside for using internally, or within the company. Retained earnings are also known as accumulated earnings, retained profit, or accumulated retained earnings. The company can use this amount for repaying its debts, or reinvesting them in its operations for expansion and diversification.
Purpose of Statement of Retained Earnings
The statement of retained earnings helps in increasing investor confidence in the company and improving market. It helps in assessing the financial health of an organization. Retained earnings exclude surplus funds of a firm, and are used in the organization for reinvestment purposes.
A capital-intensive sector or a firm in growth phase will have better retained earnings than the stable or less-capital intensive firms. This is generally because of the higher amounts reinvested for developing the assets and improving the associated technology. For instance, a firm that is influenced by technology will have more to do with asset development than a basic garment manufacturing company. This is due to the variations in the focus on creating new products. A garment manufacturing firm may have similar or stable demands, but a smartphone-based firm may need to be more adept to technology from time to time in order to stay ahead of the competing firms. Hence, the tech firms will require to keep more retained earnings as compared to the garment manufacturing company.
References for “Statement of Retained Earnings”