Companies that are earning net income, often distribute this to their shareholders in the form of dividends. It is not necessarily that the company issues dividends as it has the option to keep this money for future growth. The money which is not distributed and kept for future growth and need is disclosed in the statement of retained earnings. It is also called Accumulated Profit and Loss Statement.
Formula
Retained earnings closing balance = Retained earnings opening balance + net income for the year – dividend declared
Note: In the formula, we have written dividend declared irrespective of whether the dividend has been paid or not.
Example and Specimen Format
ABC Company
Statement of Retained Earnings
For the Year Ended 31st Dec 2015
| Retained earnings – opening balance | $10,000 |
| Net income for the year | $2,000 |
| ($500) | |
| dividend declared | |
| Retained earnings – closing balance | $11,500 |
Example
ABC is engaged in exporting meat to Middle East countries. It has a very high volume of export every month. As a result, it is enjoying a very good financial profit since 05 years. Every year, ABC declares some portion of its profit to its shareholders in the form of dividend. Like every year, this time it has declared $ 0.50 dividend per share. The paid up capital of the company is $ 100,000 of $1 shares each. Following data is available from its accounting records:
Sales revenue = $ 1,000,000
Purchases = $ 600,000
Opening stock = $ 200,000
Closing stock = $ 100,000
Electricity expenses = $ 50,000
Salaries & Wages expenses = $ 50,000
Depreciation = $ 25,000
Bad debts = $ 30,000
Rent expenses = $ 40,000
Insurance expenses = $ 20,000
Retained earnings – opening balance = $ 300,000
Required
Prepare statement of retained earnings for ABC.
Solution
Before going to prepare statement of retained earnings, it is necessary that we calculate net profit figure of ABC.
| Sales Less: Cost of goods sold Purchases Opening stock Less: Closing stock Gross profit Less: Operating expenses Electricity expenses Salaries & wages expenses Depreciation Bad debts Rent expenses Insurance expenses Net profit | 1,000,000 600,000 200,000 (100,000) 700,000 50,000 50,000 25,000 30,000 40,000 20,000 485,000 |
The company has declared $ 0.5 dividend per share. The total amount of dividend would be 0.5 x 100,000 = $ 50,000. It means that out of $ 485,000 net profit, $ 50,000 would be distributed as dividend to the shareholders and the rest of the money will be kept in retained earnings for future growth or heavy expenses. Now, we will prepare statement of retained earnings.
ABC
Statement of Retained Earnings
For the year ended ……
| Retained earnings – opening balance Profit for the year Dividend declared Retained earnings – closing balance | 300,000 485,000 (50,000) 735,000 |