What is the Statement of Retained Earnings?

Alright, so the last one we talked about the income statement

This one we're going to talk about the statement of retained earnings which is the second one in our order

The statement of retained earnings is a pretty basic one. It's only about five lines

It's very short. It doesn't deviate in length. But this is the statement of retained earnings

And what that does, it's a financial statement that reports changes in retained earnings

thus the name, of the business over a period of time. Now that kind of opens up another door

What is retained earnings? earnings that refers to the income, again, revenue minus expenses, that has not been distributed as

dividends to its owners. Okay, well, there's another door. What is a dividend? A dividend is a transfer

of some or all of a business's earned assets to its owners. So the best way to think about this

again, this example, is a bank account. Think about your bank account. Your bank account right now

you put money into it. You can kind of see that as a revenue because that's the money that you've

earn. And then the money you take out of it to pay your bills, that's going to be like expenses

And at the end of the year, you should hopefully have some at the end of the year left

Now, let's say at the end of the year, you also have a really good friend. And that really good

friend has a birthday coming up. And you want to give that buddy a hundred bucks for their birthday

Okay. Have they done anything for that hundred dollars? Not really. They haven't done any service

or they haven't given you a product. It's just a good friend. But you still want to give them that

that present That kind of like a dividend You have a surplus of money in your bank account your net income and you want to give your buddy that money They haven done anything for it yet or haven done anything for it at all other than just give you their time and their friendship That like a dividend You going to give it to the owners

because you have a surplus and you think they deserve it. You're more or less giving them

thanks. But that's what a dividend is. This is what a statement of retained earnings looks like

Again, this is the five lines and this is the bare basic. You could have lines added to it

depending on how you do it. Sometimes they call this a statement of equity, and so you have common

stock added into it. This is the one that I prefer. So you start with your retained earnings at the

beginning of the year. Whatever you started the year with, and it's important to understand, our beginning balances are always our ending balances from the previous year. They just carry

over. So our beginning retained earnings as of January 1st of whatever year you're in

plus the net income. Notice the net income came from the last income statement that we just

finished, the $100,000. That's going to give us an intermediate balance of $225,000. That's what

we have available to give in dividends if we wanted to. Then we take out our dividends if we

do give that birthday present out, $75,000. That's going to give us our ending retained earnings for

this year, which is going to be $150,000. And as hopefully you guessed it, the ending retained

earnings of this year will become the beginning balance next year. So that $150,000 will start

at the top for the next year. If you are a brand new business

then your beginning balances are zero. So if this was a first started company that just started this year

our beginning retained earnings would be zero. And you would follow the same thing. Sometimes you don't even give out dividends

There are many companies that don't give out dividends. So that line item would be zero. And so that's the statement of retained earnings

Appreciate it