Earnings refer to a company’s income after taking expenses into account. A business may choose to either keep these funds in the company or give them out to its shareholders. Retained earnings refer to the portion of business income that the business keeps. The beginning balance of retained earnings shows the level of retained earnings at the beginning of a certain period. A company has to record its retained earnings in its financial statements.
1. Gather the company’s financial statements for the period under consideration and the previous period. Collect the income statement, retained earnings statement and balance sheet.
2. Review the business’ income statement. It usually details the amount of revenues the company receives and the amount of expenses the company pays out over a specified period of time. The income statement then adds up all these figures to arrive at an overall profit or loss figure. The beginning retained earnings usually does not appear in this section of the income statement because it has nothing to do with the amount of earnings the company earns over the time period.
3. Check the beginning retained earnings you find in the current period’s financial statements. Compare this amount with the retained earnings shown in the previous period’s balance sheet or retained earnings statement. The beginning retained earnings of this period must equal the ending retained earnings of the previous period. For example, if the company has $50,000 in retained earnings at the end of last year, it should have the same amount of retained earnings at the beginning of this year.
4. Analyze the portion of the document that states the beginning retained earnings. The beginning retained earnings should be followed with the overall earnings of the current period as shown in the income statement. It should then state the amount of dividends paid out to shareholders. The section should end with the ending retained earnings, which indicate the level of retained earnings at the end of the period. Also known as the statement of retained earnings, this section may accompany the income statement or appear as a separate financial document.
- If you check the current period’s balance sheet, you will see that the ending retained earnings appear in the shareholders’ equity section.
- Austin Community College: Statement of Retained Earnings
- Wake Forest University: Accumulated Retained Earnings Statement
- University of Scranton; Financial Statement Analysis; Ralph Grambo
- The University of Georgia; How to Read a Financial Statement; Asterios Kefalas
- Jacksonville State University: Financial Statement Preparation