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The statement of retained earnings is a financial statement that is prepared to reconcile the beginning and ending retained earnings balances. Retained earnings are the profits or net income that a company chooses to keep rather than distribute it to the shareholders.
In other words, assume a company makes money (has net income) for the year and only distributes half of the profits to its shareholders as a distribution. The other half of the profits are considered retained earnings because this is the amount of earnings the company kept or retained.
The retained earnings calculation or formula is quite simple. Beginning retained earnings corrected for adjustments, plus net income, minus dividends, equals ending retained earnings. Just like the statement of shareholders equity , the statement of retained is a basic reconciliation. It reconciles how the beginning and ending RE balances. In other words, how did the RE balance on January 1 turn into the RE balance on December 31?
Although this statement is not included in the four main general-purpose financial statements, it is considered important to outside users for evaluating changes in the RE account. This statement is often used to prepare before the statement of stockholder's equity because retained earnings is needed for the overall ending equity calculation.
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