Why statement of retained earnings matters to a first-time founder
It explains why accumulated profit kept in the company changed during an accounting period. Founders can see how current profit, losses, dividends and corrections affected the balance available to support the business. Lenders and investors may use it to understand distribution choices and the company’s financial history.
Examples of statement of retained earnings
A company starts the year with ₦120 million of retained earnings, earns ₦45 million after tax and declares ₦15 million in dividends. Its closing retained earnings are ₦150 million: ₦120 million + ₦45 million − ₦15 million. The statement presents each movement rather than showing only the closing balance.
Common misunderstanding
Retained earnings are not a cash reserve. The profits may already have funded equipment, inventory or other assets, so the statement does not show money available to spend. It also does not report every change in equity; a broader statement of changes in equity may include share capital and other reserves.
When to use it
Prepare or review it when producing period-end accounts, considering dividends or explaining movements in accumulated profit. Reconcile the opening balance to the previous closing balance and current profit to the income statement. Presentation and filing requirements depend on the applicable accounting standards and jurisdiction.