The statement of retained earnings shows the relationship between a company’s income statement and balance sheet from one reporting period to the next. Specifically, it indicates that the company’s earnings after tax (EAT) have been moved into the company’s retained earnings account, as EAT must be set to zero at the start of each new reporting period. EAT net of dividend is moved from the statement of retained earnings to the balance sheet.
The statement of retained earnings is the staging point between the income statement and the balance sheet. It shows any deductions from the EAT (such as dividends paid to shareholders) to determine the net amount left over. This amount is left in the company and is accounted for by adding it to the retained earnings account on the balance sheet.
The statement also shows the changes in the retained earnings account between the opening and closing periods identified on each balance sheet.
More about the statement of retained earnings
Below is an example of a statement of retained earnings, showing the earnings ABC Co. held at the beginning of the reporting period, with any EAT added in, the dividends deducted and what was retained at the end of the period.