The Statement of Retained Earnings (and similarly the Equity Statement, Statement of Owner's Equity for a single proprietorship, Statement of Partner's Equity for partnership, and Statement of Retained Earnings and Stockholders' Equity for corporation) are basic financial statements

Financial statements

A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...

.

The statements explain the changes in a company's retained earnings

Retained earnings

In accounting, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or...

 over the reporting period. They break down changes in the owners' interest in the organization, and in the application of retained profit or surplus from one accounting period

Accounting period

An accounting period is a period with reference to which United Kingdom corporation tax is charged. It helps dictate when tax is paid on income and gains...

 to the next. Line items typically include profits or losses from operations, dividends paid, issue or redemption of stock, and any other items charged or credited to retained earnings.

The statements are expected by Generally Accepted Accounting Principles

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards...

 and explain the owners' equity

Equity (finance)

In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...

 and retained earnings shown on the balance sheet

Balance sheet

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

, where:

Owners' Equity = Assets − Liabilities

Requirements of the U.S. GAAP

A retained earnings statement is required by the U.S. Generally Accepted Accounting Principles (U.S. GAAP) whenever comparative balance sheets and income statements are presented. It may appear in the balance sheet

Balance sheet

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

, in a combined income statement

Income statement

Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...

 and changes in retained earnings statement, or as a separate schedule.

Therefore, the statement of retained earnings uses information from the income statement

Income statement

Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...

 and provides information to the balance sheet

Balance sheet

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

.

Retained earnings are part of the balance sheet

Balance sheet

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

 (another basic financial statement) under "stockholders equity (shareholders' equity)" and is mostly affected by net income earned during a period of time by the company less any dividends paid to the company's owners / stockholders. The retained earnings account on the balance sheet is said to represent an "accumulation of earnings" since net profits and losses are added/subtracted from the account from period to period.

Retained Earnings are part of the Statement of Changes in Equity.
The general equation can be expressed as following:

Ending Retained Earnings = Beginning Retained Earnings − Dividends Paid + Net Income

This equation is necessary to use to find the Profit Before Tax to use in the Cash Flow Statement under Operating Actvities when using the indirect method. This is used whenever a comprehensive income statement is not given but only the balance sheet is given.

Requirements of IFRS

IAS 1 requires a business entity to present a separate Statement of Changes in Equity (SOCE) as one of the components of financial statements.

The statement shall show: (IAS1.106)

1. total comprehensive income for the period, showing separately amounts attributable to owners of the parent
   Parent company
   A parent company is a company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors; the second company being deemed as a subsidiary of the parent company...
   
    and to non-controlling interests
2. the effects of retrospective application, when applicable, for each component
3. reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity
   Equity (finance)
   In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
   
   , separately disclosing:

• profit or loss
  Net income
  Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...
  
  
• each item of other comprehensive income
• transactions with owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control

However, the amount of dividends recognised as distributions, and the related amount per share, may be presented in the notes

Notes to the Financial Statements

Notes to financial statements are additional notes and information added to the end of financial statements to supplement the reader with more information. Notes to financial statements help the computation of specific items in the financial statements as well as provide a more comprehensive...

 instead of presenting in the statement of changes in equity. (IAS1.107)

For Small and Medium-size Enterprises (SMEs), the Statement of Changes in Equity should show all changes in equity including:

• total comprehensive income
• owners' investments
• dividends
• owners' withdrawals of capital
• treasury share transactions

They can omit the statement of changes in equity if the entity has no owner investments or withdrawals other than dividends, and elects to present a combined statement of comprehensive income and retained earnings.

See also

• International Financial Reporting Standards
  International Financial Reporting Standards
  International Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....
  
   (and its requirements
  Requirements of IFRS
  This article lists some of the important requirements of International Financial Reporting Standards.References to IFRS standards are given in the standard convention, for example refers to paragraph 10 of IAS1, Presentation of Financial Statements.....
  
  )
• Income statement
  Income statement
  Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
  
  
• Cash flow statement
  Cash flow statement
  In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing...
  
  
• Comprehensive income
  Comprehensive income
  Comprehensive income is a specific term used in companies' financial reporting from the company-whole point of view. Because that use excludes the effects of changing ownership interest, an economic measure of comprehensive income is necessary for financial analysis from the shareholders' point...
  
  
• Accumulated other comprehensive income
  Accumulated other comprehensive income
  Note: Reference cited below, FAS130, remains the most current accounting literature in the United States on this topic.In 1997 the United States Financial Accounting Standards Board issued Statement on Financial Accounting Standards No. 130 entitled “Reporting Comprehensive Income”...