Earnings Statement

What is an Earnings Statement?

An earnings statement, also known as an income statement or profit and loss statement, is a financial document showing a company’s revenues, expenses, and net income over a specified period. It provides an overview of a company’s financial performance during the specified period, usually quarterly or annually.

The earnings statement typically includes the following information:

1. Revenues: The total amount the company has earned during the specified period, usually broken down by product, service, or geographic location.
2. Cost of goods sold (COGS): The direct costs associated with producing or delivering the company’s products or services, such as raw materials, labor, and shipping.
3. Gross profit: The difference between revenues and COGS, representing the amount of money the company has earned before deducting operating expenses.
4. Operating expenses: The costs of running the company’s day-to-day operations, such as rent, utilities, salaries, and marketing.
5. Operating income: The difference between gross profit and operating expenses, representing the amount of money the company has earned before deducting interest and taxes.
6. Interest and taxes: The amount of money the company has paid in interest on loans and taxes to the government.
7. Net income: The final profit or loss after all expenses have been deducted from revenues, indicating the company’s overall financial health.

What is a Retained Earnings Statement?

A retained earnings statement is a financial document that shows the changes in a company’s retained earnings over a specific period of time. Retained earnings refer to the portion of a company’s profits that are not distributed as dividends to shareholders but are kept by the company for future use.

The retained earnings statement typically includes the following information:

1. Beginning retained earnings: The balance of retained earnings from the previous period.
2. Net income: The profit the company has earned during the current period, as reported on the company’s income statement.
3. Dividends declared: The amount of money paid to shareholders as dividends during the current period.
4. Ending retained earnings: The final balance of retained earnings for the current period is calculated by adding the net income to the beginning retained earnings and subtracting any dividends declared.

How to Prepare a Statement of Retained Earnings?

Preparing a statement of retained earnings involves the following steps:

1. Determine the beginning balance of retained earnings: This can be found on the previous period’s balance sheet or the previous period’s statement of retained earnings.
2. Add the net income or subtract the net loss: This information can be found on the company’s income statement for the period being reported.
3. Subtract any dividends paid to shareholders during the period: This information can be found on the company’s cash flow statement or the board of directors’ meeting minutes.
4. Calculate the ending balance of retained earnings: This is the final balance of retained earnings for the period being reported and is calculated by adding the beginning balance of retained earnings to the net income (or subtracting the net loss) and then subtracting any dividends paid to shareholders during the period.
5. Prepare the statement of retained earnings: The statement should begin with the beginning balance of retained earnings, followed by the net income or net loss for the period, the dividends paid to shareholders, and the ending balance of retained earnings.

The statement of retained earnings can be included as a separate financial statement or a section of the company’s balance sheet. It is typically prepared quarterly or annually, depending on the company’s reporting requirements.

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