How to Calculate End-of-Year Retained Earnings

Retained earnings represent the cumulative net profits a business has kept and reinvested rather than distributing to its owners. This accumulated profit plays an important role in a company’s financial health, indicating the portion of earnings available for future growth, debt repayment, or other strategic investments.

Components for Calculation

The calculation of end-of-year retained earnings requires three specific financial figures. Beginning retained earnings represents the total accumulated earnings a company has held onto from all prior accounting periods up to the start of the current period. This figure reflects the company’s historical profitability and its past decisions regarding profit distribution.

Net income or net loss for the current accounting period is another component. Net income signifies the profit a company generates after all expenses, including taxes, have been deducted from its revenues. Conversely, a net loss indicates that a company’s expenses exceeded its revenues during the period, thereby reducing its overall accumulated earnings.

Dividends paid during the current period are the third component. Dividends are distributions of a company’s profits to its shareholders. These payments reduce the amount of earnings available for reinvestment within the company, directly impacting the retained earnings balance.

Steps to Calculate

Calculating end-of-year retained earnings involves a straightforward formula that integrates these three components. The formula is: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends = End-of-Year Retained Earnings.

To illustrate, consider a business that started the year with $150,000 in retained earnings. Throughout the year, this business generated a net income of $75,000, reflecting its profitability after all operational costs and taxes. During the same period, the company distributed $20,000 in dividends to its shareholders.

Applying the formula, you would add the net income to the beginning retained earnings: $150,000 (Beginning Retained Earnings) + $75,000 (Net Income) = $225,000. From this sum, you then subtract the dividends paid: $225,000 – $20,000 (Dividends) = $205,000. Therefore, the end-of-year retained earnings for this business would be $205,000.

Source of Financial Information

Locating the necessary financial figures for the retained earnings calculation involves examining a company’s primary financial statements, which are prepared according to generally accepted accounting principles (GAAP). The beginning retained earnings can be found in the equity section of the prior period’s Balance Sheet. Alternatively, this figure is presented at the start of the Statement of Retained Earnings or the Statement of Shareholders’ Equity.

The net income or net loss for the current period is reported on the Income Statement, often referred to as the “bottom line” as it is the final figure after all revenues and expenses are accounted for. This statement summarizes a company’s financial performance over a specific time frame, such as a quarter or a year.

Information regarding dividends paid can be located in several places within the financial statements. Dividends are detailed on the Statement of Retained Earnings or the Statement of Shareholders’ Equity, showing their impact on the retained earnings balance. Additionally, dividend payments are reported as a cash outflow in the financing activities section of the Statement of Cash Flows. In some instances, details about dividends may also be found in the notes accompanying the financial statements.