How to Calculate Retained Earnings With a Formula

Retained earnings represent the cumulative profits of a business that have not been distributed to its shareholders as dividends. Instead, these earnings are kept within the company to be reinvested into operations, used for debt reduction, or held for future strategic initiatives. Understanding this figure provides insight into a company’s financial health and its capacity for internal financing and growth.

Components and Formula for Retained Earnings

The calculation of retained earnings relies on a straightforward formula that considers the company’s financial performance over a specific period. This formula is typically expressed as: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends = Ending Retained Earnings. Each element within this equation plays a distinct role in determining the final retained earnings balance.

Beginning Retained Earnings

Beginning Retained Earnings refers to the amount of accumulated profits a company had at the end of the previous accounting period. This figure acts as the starting point for the current period’s calculation.

Net Income

Net Income, or Net Loss, represents the company’s profitability during the current accounting period. Net income is the revenue remaining after all operating expenses, interest, taxes, and other costs have been deducted. If a company incurs a net loss, this amount is subtracted from the beginning retained earnings.

Dividends

Dividends are distributions of a company’s profits to its shareholders. When dividends are declared and paid, they reduce the amount of earnings that a company retains, as a portion of the profit is being returned to investors rather than being reinvested in the business.

Applying the Formula: A Step-by-Step Example

To illustrate the calculation, consider a hypothetical company, “Alpha Solutions,” for its fiscal year ending December 31, 2024. Alpha Solutions began the year with an accumulated retained earnings balance. This starting figure is crucial for an accurate calculation.

Suppose Alpha Solutions reported Beginning Retained Earnings of $150,000 as of January 1, 2024. During the year, the company generated a Net Income of $75,000. This profit contributes positively to the retained earnings balance, indicating successful operations for the period. Furthermore, Alpha Solutions paid out $20,000 in dividends to its shareholders throughout 2024. These dividend payments reduce the amount of earnings available for retention within the company.

Applying the formula, the calculation would be: $150,000 (Beginning Retained Earnings) + $75,000 (Net Income) – $20,000 (Dividends).

The Ending Retained Earnings for Alpha Solutions as of December 31, 2024, would be $205,000. This final figure represents the total accumulated profits that the company has retained and not distributed, available for future use.

Locating the Necessary Financial Data

To accurately calculate retained earnings for a real company, specific financial statements provide the required figures. Each component of the formula is typically found on different standard financial reports. Knowing where to locate this data is essential for practical application.

Net Income Location

The Net Income or Net Loss figure is readily available on the company’s Income Statement. This statement summarizes a company’s revenues, expenses, and profits over a specific accounting period. The net income is usually the final line item on this report.

Beginning Retained Earnings and Dividends Location

The Beginning Retained Earnings balance and the Dividends paid during the period are typically found on the Statement of Retained Earnings or the Statement of Changes in Equity. The Statement of Retained Earnings specifically details the changes in the retained earnings balance from the beginning to the end of an accounting period. Dividends paid are explicitly listed as a deduction in this statement. While the primary source is the Statement of Retained Earnings, information regarding dividends might also be referenced within the Cash Flow Statement, specifically in the financing activities section.