How to Calculate Statement of Retained Earnings

The Statement of Retained Earnings serves as a bridge between a company’s financial performance and its financial position. This financial statement illustrates how a business’s accumulated profits change over a specific accounting period. It details how much of a company’s earnings are kept within the business for reinvestment and how much is distributed to shareholders. The statement provides a clear picture of a company’s profit utilization strategy, showing whether it prioritizes growth through reinvestment or returns to its owners.

Elements Required for Calculation

Before calculating the Statement of Retained Earnings, specific financial figures must be gathered. Obtaining these numbers from other financial statements or company records is the first step toward understanding how profits are managed.

The starting point for the calculation is the Beginning Retained Earnings. This figure represents the accumulated profits a company has held onto from all prior accounting periods, essentially the ending balance of retained earnings from the previous period. This amount can be found on the prior period’s balance sheet within the equity section or on the company’s previous Statement of Retained Earnings.

Next, the Net Income or Net Loss for the current accounting period is required. Net income signifies the profit earned after all expenses have been deducted from revenues, while a net loss indicates that expenses exceeded revenues. This figure is obtained directly from the company’s Income Statement, also known as the Profit and Loss Statement, for the period being analyzed.

Dividends Declared represent the portion of a company’s profits that are distributed to its shareholders. These distributions reduce the amount of earnings retained within the business. Information regarding dividends declared can be found in various company records, such as board resolutions authorizing the payments, or on the Statement of Cash Flows in the financing activities section.

Finally, Prior Period Adjustments may occasionally be necessary. These adjustments correct errors discovered in financial statements from previous reporting periods. While less common for routine calculations, these adjustments are made directly to the beginning retained earnings balance to ensure the correction does not distort the current period’s profit or loss. Details on these adjustments are found in auditor’s reports or specific accounting entries related to error corrections.

Performing the Calculation

With all the necessary financial elements identified and sourced, the next step involves combining these figures through a standard arithmetic process. The calculation for the ending retained earnings balance follows a consistent formula, reflecting the flow of earnings into and out of the company’s accumulated profits.

The fundamental formula for calculating ending retained earnings is: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends Declared +/- Prior Period Adjustments = Ending Retained Earnings. This equation systematically tracks the changes from the start of the period to its conclusion. Any net income increases the retained earnings, while a net loss decreases them. Dividends paid out to shareholders also reduce the retained earnings balance.

Consider a hypothetical example for a company, “Example Corp.” On January 1, 2024, Example Corp. had Beginning Retained Earnings of $500,000. During the year ended December 31, 2024, the company generated a Net Income of $150,000. Additionally, Example Corp. declared and paid Dividends of $30,000 to its shareholders. For this illustration, assume there were no Prior Period Adjustments.

To calculate the Ending Retained Earnings for Example Corp., start with the $500,000 beginning balance. Add the Net Income of $150,000, which brings the subtotal to $650,000. From this amount, subtract the $30,000 in Dividends Declared. The resulting Ending Retained Earnings for Example Corp. on December 31, 2024, would be $620,000.

Preparing the Final Statement

Once the ending retained earnings balance has been calculated, the final step involves presenting this information in a clear and structured format. The Statement of Retained Earnings adheres to a layout ensuring that stakeholders can easily understand the company’s profit management over the designated period.

The statement begins with a three-line heading: the company’s legal name, the title “Statement of Retained Earnings,” and the specific accounting period covered (e.g., “For the Year Ended December 31, 2024”). Following the heading, the statement lists the “Beginning Retained Earnings” as the initial line item. Subsequently, the statement presents the “Net Income” for the period, which is added to the beginning balance, or “Net Loss,” which is subtracted. Directly following this, “Dividends Declared” are listed and subtracted, as these distributions reduce the amount of earnings kept within the business. Any “Prior Period Adjustments” would also be shown here, either adding to or subtracting from the balance, depending on their nature. The statement concludes with the “Ending Retained Earnings,” representing the final calculated balance.

Using the hypothetical Example Corp. from the previous section, the formal statement would appear as follows:

Example Corp.
Statement of Retained Earnings
For the Year Ended December 31, 2024

Beginning Retained Earnings, January 1, 2024 $500,000
Add: Net Income $150,000
Less: Dividends Declared $30,000
Ending Retained Earnings, December 31, 2024 $620,000

This completed statement clearly communicates how much profit the company has reinvested back into the business versus how much was distributed to shareholders. It provides insight into management’s decisions regarding profit utilization, which can be an indicator of a company’s growth strategy and financial health. The ending balance from this statement also flows directly into the equity section of the company’s balance sheet for the close of the period.