Retained earnings appear on the balance sheet of the company. Retained earnings can also be published as a separate financial statement, and, although not as a rule, can be specified in the statement of profit and loss.
Retained earnings is the cumulative net income or profit of the company after payment of dividends. Retained earnings is the net profit after payment of dividends available for reinvestment in the company or for the repayment of debt. Because retained earnings represent the rest of the company’s earnings that are not paid in the form of dividends, they are often referred to as save the excess.
The statement of retained earnings is one of the financial statements that publicly traded companies must publish, at least on an annual basis.
The calculation of retained earnings, adds net income to the beginning retained earnings at beginning of the period and subtract the dividends must be paid to the shareholders. The formula is as follows:
Retained earnings = beginning retained earnings + Net profit – dividends
If the company has a net loss for the period, and the figure was more than beginning retained earnings, retained earnings statement, the company shows a negative balance or deficit.
The retained earnings statement shows the surplus or retained earnings between the reporting periods. The statement also delineates the changes in the net income for the period, which can be as often as every three months, but necessary to produce each year. As the statement of retained earnings is such a short statement, it may sometimes be listed at the bottom of the report on profits and losses after the net income.
Investors pay close attention to retained earnings, because the accounts shows how much money is available to be reinvested back into the company and how it is available for payment of dividends to shareholders.