The retained earnings statement is a financial statement that shows the changes in retained earnings during the year. The company prepares the statement from the Retained Earnings account. The Illustration below shows (in account form) transactions that affect retained earnings.
|
Retained earnings |
|
|
1. Net loss 2. Prior period adjustments for 3. Cash dividends and stock dividends 4. Some disposals of treasury stock |
1. Net income 2. Prior period adjustment for understatement of net income |
As indicated, net income increases retained earnings, and a net loss decreases retained earnings. Prior period adjustments may either increases or decreases retained earnings. Both cash dividends and stock dividends decrease retained earnings. The circumstances under which treasury stock transactions decreases retained earnings.