How much money does your business have?
Business finances are inordinately complex, and there’s no one simple way of evaluating what a business is worth. So, when trying to determine what a business is worth, and how healthy the business is, it’s useful to look at a number of different metrics.
One such metric is the retained earnings of the business. To know the retained earnings of a business, you simply look at their statement of retained earnings.
In this brief post, we’ll explain retained earnings, statements of retained earnings, how to prepare a statement of retained earnings, and the value of providing such a statement publicly.
Let’s get started.
What are retained earnings?
Retained earnings, sometimes called retained profits or accumulated earnings, are the profits a business has held in reserve. They are calculated by subtracting dividends paid out to shareholders from earnings after tax (EAT). The remaining amount is then added to the existing retained earnings.
In other words, if a company has $50,000 in profit after taxes, expenses, and payments to shareholders are subtracted, and the company has $0 in retained earnings, the company then has $50,000 in retained earnings.
Conversely, if a company already has $50,000 in retained earnings, and they make another $50,000 in profit after taxes, expenses, and payments to shareholders, the company then has $100,000 in retained earnings.
What is a statement of retained earnings?
The statement of retained earnings is simply a document that outlines any changes to retained earnings over a given period. Retained earnings are almost universally reinvested into the company. As such, capital intensive industries tend to have higher statements of retained earnings – that capital will be redirected to business growth.
Releasing statements of retained earnings can help improve market confidence in a business, and give investors insight into the behaviours of that business. These statements are also useful internally.
How to prepare a statement of retained earnings
Preparing a statement of retained earnings is incredibly simple – something that can’t be said of most financial statements. Your statement should look something like this:
YOUR COMPANY NAME
STATEMENT OF RETAINED EARNINGS
FOR THE (X MONTH/YEAR) PERIOD ENDING (DATE)
Retained earnings: (Period Start Date): $X
Add: Earnings after tax (EAT): $Y
Less: Dividends: -$Z
= Retained earnings: (Period End Date): $T
As we said, probably among the simplest financial documents you can prepare! Simple addition and subtraction. There’s no need to state what the company plans on doing with the retained earnings in the statement.
With that, you know almost everything you need to about retained earnings – other than how you’re going to use them!
Accounting firms in Winnipeg can help you prepare statements of retained earnings – and other financial documents, including income statements for calculating EAT. If you have any questions at all, give us a call!