statement of retained earnings

The statement of retained earnings is a short bridge report that explains one number: how much profit the company has kept and reinvested over its life, rather than paid out to owners. Picture a jar where the business drops in each year's leftover profit and scoops out anything it hands to shareholders. This statement shows the jar at the start of the year, what got added, what got taken out, and the jar at the end.

Its arithmetic is simple and always the same: beginning retained earnings, plus net income for the period, minus any dividends declared, equals ending retained earnings. If a company starts the year with $50,000 of retained earnings, earns $12,000, and pays $2,000 in dividends, it ends with $60,000. A net loss instead of profit, or any prior-period adjustment, would reduce the balance. The ending figure then appears in the equity section of the balance sheet.

This statement is the link that makes the income statement and balance sheet articulate, which is why it matters even though it is the smallest of the reports. Note the common confusion: retained earnings is not a pile of cash. It is an accumulated claim that has usually been spent on inventory, equipment, and growth — a company can have large retained earnings and very little cash at the same time.