How to Calculate Retained Earnings From a Balance Sheet
Gain a clear perspective on how a company's accumulated earnings influence its financial position. Understand this crucial element of corporate equity.
Retained earnings represent the cumulative total of a company’s profits that have been kept within the business rather than distributed to shareholders as dividends. This figure reflects the portion of earnings reinvested in the company for growth, debt reduction, or other operational needs. It serves as an indicator of a company’s financial health and its ability to generate and retain wealth over time. While the balance sheet provides the final balance of retained earnings at a specific point, its change over a period involves several financial components.
Understanding the Core Elements
Calculating the change in retained earnings requires understanding the specific financial elements that directly influence this account. The starting point for any period’s calculation is the beginning retained earnings balance, which represents accumulated earnings carried forward from the previous accounting cycle.
Net income, or a net loss, is another direct influencer of retained earnings. Net income represents the profit a company earns after accounting for all revenues and expenses over a specific period. When a company generates net income, it increases the retained earnings balance; conversely, a net loss reduces it.
Dividends also significantly impact retained earnings. These are distributions of a company’s profits directly to its shareholders, decreasing the retained earnings balance as they are paid out.
Identifying Retained Earnings on a Balance Sheet
When examining a company’s financial position, the balance sheet provides a snapshot of its assets, liabilities, and equity at a specific point in time. Retained earnings are typically found within the equity section of this statement. The equity section outlines the owners’ stake in the company, which includes various accounts such as common stock, additional paid-in capital, and retained earnings.
The figure presented on the balance sheet for retained earnings is the ending balance for that particular reporting period. This amount represents the cumulative sum of all profits the company has generated since its inception, less any losses and dividends paid out to shareholders up to that date. It is a single, consolidated figure reflecting the outcome of all past financial activities.
Executing the Calculation
Calculating the retained earnings for a specific period involves a straightforward formula that integrates the core elements. The standard formula for determining the ending retained earnings balance is: Retained Earnings (Ending) = Retained Earnings (Beginning) + Net Income (or – Net Loss) – Dividends. This calculation bridges the retained earnings from one period to the next, reflecting the changes that occurred.
To begin the calculation, you must obtain the beginning retained earnings. This figure is readily available on the prior period’s balance sheet, serving as the starting point for the current period’s reconciliation. For instance, if you are calculating for the year ending December 31, 2024, the beginning retained earnings would be the ending balance from December 31, 2023.
Next, determine the net income or net loss for the current period. This figure is found on the company’s income statement, also known as the statement of operations or profit and loss statement, for the specific period being analyzed.
Finally, identify any dividends declared and paid during the period. Information regarding dividends can be found on the company’s statement of retained earnings or within the financing activities section of the statement of cash flows.
Consider a company that had beginning retained earnings of $500,000 on January 1, 2024. During the year ending December 31, 2024, the company reported a net income of $150,000 and declared and paid dividends totaling $50,000. Applying the formula, the ending retained earnings would be $500,000 (Beginning) + $150,000 (Net Income) – $50,000 (Dividends), resulting in an ending retained earnings balance of $600,000. This $600,000 would then appear on the company’s balance sheet as of December 31, 2024.