Bookkeeping Explained: The Statement of Retained Earnings
Running a rapidly expanding business means that there are responsibilities that you should no longer take on yourself. One of the first things most companies outsource to other firms is their accounting. And while competent services like Totally Booked provide excellent services, you still need to understand how accounting works. Here is what you need to know:
What Are Statements of Retained Earnings?
To understand what Statements of Retained Earnings are, you first need to know what financial statements are.
Financial statements are accounting documents required by law for businesses to create on a monthly, quarterly, and yearly basis according to widely accepted accounting principles.
The three major statements are the income statement, balance sheet, and cash flow statement. Statements of retained earnings usually always come with these, especially in larger companies. They show account balances and their changes, alongside accounts like net profit.
What Are Retained Earnings?
In the balance sheet statement, Retained Earnings refer to a portion of the earnings left after dividends have been distributed to shareholders. This is different from revenue, which is a measure of the monetary success of the company’s financial year.
There are two ways to look at retained earnings. It is considered a portion of the profit that is retained from net income reported at the end of the financial year and saved for the future to be used as shareholder’s equity. It is also a significant component of shareholder equity that can help a company determine its book value.
The Statement of Retained Earnings, Explained
In simple terms, the Statement of Retained Earnings shows the earnings that were held onto at the end of the financial period. The statement of retained earnings reports a detailed direction of the profits during the reporting period.
Not every statement shows the same thing every period. The accuracy of the data of this year will depend highly on the statement from last year. If there are any errors found from the previous year, accounting has to submit corrections for the current year.
What Your Statement of Retained Earnings Mean
Statements of Retained Earnings are important because they provide the year-by-year data of how much the company is thriving financially. They can reflect both profit and loss. When your retained earnings come back negative, it means that expenses have exceeded income. Having one bad year isn’t ideal, but it is possible to recover from it the year after. But if it has been consistently negative, this can be quite alarming.
Conclusion
Understanding the basics of a Statement of Retained Earnings can help you build a complete picture of what goes on in accounting. While you can outsource the work to a competent accounting and bookkeeping service, it is important to understand the fundamentals—including your statement of retained earnings.