How to prepare a statement of retained earnings + formula

Let's face it—managing finances isn't always the most exciting part of running your business. But as an entrepreneur, startup founder, or small business owner, clarity around your company's financial health is essential. A critical part of this clarity comes from understanding your company's statement of retained earnings.

What exactly is a statement of retained earnings?

Your statement of retained earnings offers a clear view of how your business handles its profits, specifically detailing the profits retained after paying dividends to shareholders.

You can think of it as a snapshot revealing your business's capacity for reinvestment and long-term growth.

It's especially valuable for startups and growing companies because it provides essential insights into your financial strategy. Unlike your income statement (tracking revenue and expenses) or your balance sheet (highlighting assets and liabilities), this statement specifically answers the question, "What did we do with our profits?"

When should you prepare a statement of retained earnings?

Typically, you'll prepare this statement monthly, quarterly, or annually. 

Additionally, major events—like raising new capital, audits, or dividend payments—also require up-to-date retained earnings reporting.

If you’re interested in tracking these critical financial events automatically, you can also check out Rho’s business banking platform—it makes proactively managing your financial milestones easier than ever.

What goes into a statement of retained earnings?

There’s 4 main parts to a statement, some of them are things you’ll have to prepare:

1. Beginning retained earnings balance
2. Net income (or net loss)
3. Dividends paid (cash or stock dividends)
4. Ending retained earnings balance

Statement of retained earnings formula

Here’s how you calculate it: 

Beginning retained earnings balance + Net income - Dividends paid 

= Ending retained earnings balance

Step-by-step guide to preparing your statement of retained earnings

Let’s explain each step of the statement of retained earnings preparation process, with some examples.

1. Gather your financial information

To start, you'll need your income statement, previous balance sheet, and dividend records. Good record-keeping also simplifies this—and our Rho platform can keep all these documents organized!

2. Calculate your beginning retained earnings balance

Start with the retained earnings from your previous reporting period. If it's your first time, this number might be zero.

Example: If last year's retained earnings were $50,000, your beginning balance is $50,000.

3. Factor in your net income (or net loss)

Add your net income from the current period or subtract your net loss.

Example: If you had a net income of $20,000, your new subtotal is $70,000.

4. Account for dividends paid

Subtract any dividends paid from the subtotal.

Example: If you paid dividends of $5,000, your remaining balance is $65,000.

5. Determine your ending retained earnings balance

That’s it! This final figure represents your retained earnings for the period, which you'll report on your balance sheet under shareholders' equity.

Common questions about retained earnings

• What if retained earnings are negative? Negative retained earnings indicate cumulative losses surpassing profits, requiring careful financial planning.
• Where do retained earnings appear? Retained earnings show up on your balance sheet under shareholders' equity—not on your income statement.
• Are retained earnings cash? No, retained earnings reflect equity reinvested into your business, not cash on hand.

Tools to simplify all your finances

Thankfully, managing your finances doesn't have to be complicated. Rho offers powerful yet easy-to-use tools to simplify all your financial tasks, not just your statement of retained earnings. 

Whether it's managing expenses, streamlining payments, or gaining real-time financial insights, Rho’s integrated platform can support your business’s financial health and growth. 

Explore Rho today and see how we can make financial management effortless for your business.