How to Calculate Retained Earnings at the End of the Year

Retained earnings represent the accumulated profits a company has kept over time rather than distributing them to shareholders as dividends. They reflect a company’s financial health and its ability to generate and hold onto profits. These earnings serve as an internal source of funding, allowing businesses to reinvest in operations, expand, or pay down debt without seeking external financing. A company’s retained earnings balance provides insight into its past performance and capacity for future growth and stability.

Understanding Each Element

Calculating retained earnings involves three primary components: beginning retained earnings, net income or net loss for the period, and dividends declared. The beginning retained earnings figure serves as the starting point for the current period’s calculation, representing cumulative profits accumulated up to the end of the prior accounting period.

Net income or net loss reflects a company’s financial performance during the current period. Net income, the profit remaining after all expenses and taxes, increases retained earnings. Conversely, a net loss, occurring when expenses exceed revenues, reduces the retained earnings balance. Effective management of revenues and expenses impacts the retained earnings.

Dividends declared are distributions of a company’s profits to its shareholders. These distributions decrease the retained earnings balance. Only dividends formally declared by the company’s board of directors impact this calculation, regardless of whether they have been physically paid out yet. Both cash and stock dividends reduce retained earnings.

Applying the Retained Earnings Formula

The standard formula for calculating retained earnings at the end of an accounting period is: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends Declared = Ending Retained Earnings. The resulting figure indicates the total amount of earnings the company has retained to date.

To illustrate, consider a company that started the year with $100,000 in retained earnings. During the year, the company generated a net income of $50,000 and declared $10,000 in dividends. Applying the formula, the calculation is: $100,000 (Beginning Retained Earnings) + $50,000 (Net Income) – $10,000 (Dividends Declared) = $140,000 (Ending Retained Earnings).

If the company incurred a net loss of $20,000, the calculation adjusts to: $100,000 (Beginning Retained Earnings) – $20,000 (Net Loss) – $10,000 (Dividends Declared) = $70,000 (Ending Retained Earnings). This demonstrates how losses directly reduce accumulated retained earnings. The ending balance from one period becomes the beginning balance for the subsequent period, creating a continuous link between financial periods.

Finding the Necessary Financial Information

To calculate retained earnings, the necessary figures are found across a company’s primary financial statements. The beginning retained earnings balance is located on the prior period’s balance sheet, within the shareholders’ equity section. This figure is also presented on the statement of retained earnings, which details changes in this account over a period.

The net income or net loss for the current period is available on the income statement, often referred to as the “bottom line” figure. This statement summarizes a company’s revenues and expenses over a specific accounting period, providing the direct input needed for the retained earnings calculation. Net income flows from the income statement to the balance sheet, influencing retained earnings.

Information regarding dividends declared is found on the statement of retained earnings or the statement of stockholders’ equity, where it is shown as a reduction to retained earnings. Dividends paid are reported as a cash outflow in the financing activities section of the statement of cash flows. While dividends impact retained earnings, they do not appear on the income statement as they are not considered an expense.