How to Calculate Beginning of Year Retained Earnings

Retained earnings represent the accumulated portion of a company’s profits that have not been distributed to shareholders as dividends. Instead, these earnings are reinvested back into the business for various purposes, such as funding operations, purchasing assets, or reducing debt. Understanding the beginning of year retained earnings balance is a foundational step in financial analysis, providing insight into a company’s financial health and its capacity for future growth without external financing. This figure offers a clear starting point for assessing how a company’s profitability and dividend policies impact its equity over time.

Key Components of Retained Earnings

Net income, often referred to as the “bottom line” on the income statement, represents the profit a company earns after all expenses, including taxes, have been deducted. A positive net income increases retained earnings, while a net loss decreases them.

Dividends are distributions of a company’s profits to its shareholders, which can be in the form of cash or additional stock. These distributions reduce the retained earnings balance, as they represent earnings paid out rather than kept by the company. The ending retained earnings from the prior period is the cumulative profit retained by the company up to the close of the previous fiscal year, serving as the starting point for the current period’s calculation.

The Beginning of Year Formula

To determine the beginning of year retained earnings, one must work backward from the current period’s ending balance. The core relationship used to calculate the ending retained earnings is: Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings. Therefore, to find the beginning balance, the formula is rearranged to: Beginning Retained Earnings = Ending Retained Earnings (Current Period) – Net Income (Current Period) + Dividends (Current Period). This formula allows analysts to reconcile the retained earnings account and understand the starting equity position for a new fiscal period.

Locating Data on Financial Statements

Accessing the necessary figures requires examining a company’s primary financial statements. Net income for the current period is found on the Income Statement, also known as the Profit and Loss Statement, and is the final line item.

Dividends paid during the current period are detailed on the Statement of Retained Earnings or the Statement of Stockholders’ Equity. Dividends can also be found within the financing activities section of the Statement of Cash Flows. The ending retained earnings balance from the prior period is located on the Balance Sheet, within the shareholders’ equity section, for the preceding fiscal year-end. This same figure also appears as the “Beginning Balance” on the current period’s Statement of Retained Earnings.

Step-by-Step Calculation

To calculate beginning retained earnings, first locate the ending retained earnings balance from the most recent Balance Sheet. Next, identify the net income (or net loss) for the current reporting period from the Income Statement. Finally, ascertain the total amount of dividends paid out to shareholders during the current period, found on the Statement of Retained Earnings or Statement of Cash Flows.

Once these figures are collected, apply the formula: Beginning Retained Earnings = Ending Retained Earnings (Current Period) – Net Income (Current Period) + Dividends (Current Period). For example, if a company’s ending retained earnings are $100,000, current period net income is $20,000, and dividends paid are $5,000, the beginning retained earnings would be $100,000 – $20,000 + $5,000 = $85,000. This calculated beginning balance reveals the accumulated profits available to the business at the start of the year, before the current period’s operations and distributions.