5.2.3. The Statement of Retained Earnings

The statement of retained earnings illustrates the connection between a company’s income statement and balance sheet across consecutive reporting periods. Specifically, it details the amount of post-tax earnings that have been transferred to the company’s retained earnings. Conversely, the cash flow statement offers a comprehensive overview of the movement of cash within the business over the year.

The statement of retained earnings is the staging point between the income statement and the balance sheet.  It shows any deductions from net income (such as dividends paid to shareholders) to determine the amount left to the company as retained earnings. The statement also shows the changes in the retained earnings account between the opening and closing periods identified on each balance sheet. The numbers in the retained earnings statement do not represent surplus cash, but rather are a measure of the cumulative earnings after dividends and distributions to shareholders.