Statement of Retained Earnings - Requirements of The U.S. GAAP

Requirements of The U.S. GAAP

A retained earnings statement is required by the U.S. Generally Accepted Accounting Principles (U.S. GAAP) whenever comparative balance sheets and income statements are presented. It may appear in the balance sheet, in a combined income statement and changes in retained earnings statement, or as a separate schedule.

Therefore, the statement of retained earnings uses information from the income statement and provides information to the balance sheet.

Retained earnings are part of the balance sheet (another basic financial statement) under "stockholders equity (shareholders' equity)" and is mostly affected by net income earned during a period of time by the company less any dividends paid to the company's owners / stockholders. The retained earnings account on the balance sheet is said to represent an "accumulation of earnings" since net profits and losses are added/subtracted from the account from period to period.

Retained Earnings are part of the Statement of Changes in Equity. The general equation can be expressed as following:

Ending Retained Earnings = Beginning Retained Earnings − Dividends Paid + Net Income

This equation is necessary to use to find the Profit Before Tax to use in the Cash Flow Statement under Operating Activities when using the indirect method. This is used whenever a comprehensive income statement is not given but only the balance sheet is given.