How to Prepare a Statement of Retained Earnings: Step-by-Step Guide

Want to get a clear picture of how your company’s profits are being handled? The statement of retained earnings is your go-to tool! Here’s a step-by-step guide to preparing a statement that tells your financial story!

If you’re dipping your toes into financial reporting, you might find the statement of retained earnings quite straightforward, and surprisingly insightful. 

Whether you’re a business owner, an accountant, or just a curious investor, preparing this statement gives you a clear view of how much profit your company has kept to fuel growth rather than paid out as dividends. 

Ready for a friendly, step-by-step walkthrough? Let’s go!

Steps to Prepare a Statement of Retained Earnings

Step 1: Gather your financial information

Before getting started, make sure you have:

• The previous period’s retained earnings balance (usually from last year’s balance sheet). This is your starting point.
• The net income or net loss figure for the current period (from the income statement).
• Details about any dividends paid during the period—both cash and stock dividends if applicable.

If your company is brand new, your beginning retained earnings will often start at zero.

Step 2: Start with the beginning retained earnings balance

Your statement opens with the retained earnings amount carried over from the end of the previous period. Think of this as your company’s savings from all prior years.

For instance, if you had $100,000 in retained earnings at the end of last year, this figure begins your current statement.

Step 3: Add net income (or subtract net loss)

Next, add the net income your company earned during the current period. If the business ran at a loss, this figure will be negative and should be subtracted instead.

This step captures how profitable your company has been, more profit means more money to potentially keep and reinvest.

Step 4: Deduct dividends paid

Now, subtract any dividends paid out to shareholders during the period. Dividends decrease retained earnings because they are profits distributed rather than saved.

These could be cash dividends or stock dividends, both reduce the amount of retained earnings available.

Step 5: Calculate the ending retained earnings balance

With these numbers in hand, apply this simple formula:

Ending Retained Earnings=Beginning Retained Earnings+Net Income (or Loss)?Dividends Paid

The result is your retained earnings balance at the end of the current period, ready to be reported on the balance sheet under shareholders’ equity.

Step 6: Format your statement properly

To keep it professional and clear, your statement should include:

• The company name at the top
• The title "Statement of Retained Earnings"
• The reporting period (for example, “For the year ending 31 December 2024”)

Then, clearly list each component with labels and amounts, like so:

Extra Tips to Make Your Life Easier

• Double-check that the beginning retained earnings match the prior period’s ending balance to avoid inconsistencies.
• Keep good records of dividends, they often cause confusion if missed.
• Use accounting software if possible, many platforms generate this statement automatically.
• If preparing for investors or lenders, make sure the document is neat and easy to read.

Why Prepare This Statement Anyway?

It’s more than just ticking a box! This statement:

• Shows how profits are managed , saved for growth or paid out.
• Helps investors and lenders assess company health and sustainability.
• Bridges your income statement with your balance sheet.
• Builds trust by providing clear financial transparency.

Final thoughts 

Preparing a statement of retained earnings isn’t complicated at all. With accurate numbers and a clear format, you can present a snapshot of your company’s financial wisdom, how it balances rewarding shareholders and fuelling its own future. 

So next time you pull together your business reports, remember this friendly guide and make your statement of retained earnings not just a formality, but a powerful narrative of your company’s journey!