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Retained Earnings Formula: Definition, Formula, and Example

statement of retained earnings

Take a couple of minutes and fill in the income statement and balance sheet columns. Looking at the asset section of the balance sheet, Accumulated Depreciation–Equipment is included as a contra asset account to equipment. The accumulated depreciation ($75) is taken away from the original cost of the equipment ($3,500) to show the book value of equipment ($3,425).

Scenario 1 – Bright Ideas Co. starts a new accounting period with $200,000 in retained earnings. After the accounting period ends, the company’s board of directors decides to pay out $20,000 in dividends to shareholders. Unlike net income, which can be influenced by various factors and may fluctuate significantly statement of retained earnings between periods, retained earnings offer a more consistent and reliable indicator of the business’s financial health. A strong retained earnings figure suggests that a company is generating profits and reinvesting them back into the business, which can lead to increased growth and profitability in the future.

How to find retained earnings

If we go back and look at the trial balance for Printing Plus, we see that the trial balance shows debits and credits equal to $34,000. Presentation differences are most noticeable between the two forms of GAAP in the Balance Sheet. Under US GAAP there is no specific requirement on how accounts should be presented.

At the end of 2019, John’s Bicycle Shop had retained earnings in the amount of $90,000, which can be used to invest back into the business, such as by purchasing a larger storefront. The money can also be distributed to John, his brother, and his sister as a dividend, or some combination of the two options. A decrease in retained earnings is not necessarily cause for alarm, as any time you invest money back into your business, your retained earnings will likely decrease.

Retained Earnings Calculation Example (Upside Case)

The prior period balance can be found on the opening balance sheet, whereas the net income is linked to the current period income statement. On the balance sheet, the “Retained Earnings” line item is recognized within the shareholders’ equity section. Retained earnings are usually considered a type of equity as seen by their inclusion in the shareholder’s equity section of the balance sheet.

statement of retained earnings