How to Calculate the Balance of Retained Earnings

Retained earnings represent the cumulative portion of a company’s net income that it has kept, rather than distributing to its shareholders as dividends. This accumulated profit indicates a company’s financial health and its capacity to generate and retain earnings. Businesses often utilize these funds for reinvestment into operations, such as expanding production, funding research and development, or paying down debt, fueling future growth without external financing.

Understanding the Core Components

Calculating retained earnings involves three primary financial elements.

The first is Beginning Retained Earnings, which is the balance of accumulated profits from the end of the previous accounting period. This figure becomes the starting point for the current period’s calculation and can be found in the shareholders’ equity section of a company’s balance sheet.

The second component is Net Income, or Net Loss, for the current period. This figure represents the company’s profitability, calculated by subtracting all expenses, including taxes, from its revenues. A positive net income increases retained earnings, signifying that the company has generated more revenue than its costs, while a net loss decreases this balance.

Finally, Dividends Declared are the third component. Dividends are distributions of a company’s profits to its shareholders, which can be in the form of cash or additional shares. When a company declares dividends, these amounts reduce the retained earnings balance.

The Retained Earnings Formula

The standard calculation for retained earnings provides a clear way to determine how much profit a company has accumulated after accounting for its current period’s performance and shareholder distributions. This calculation links the income statement and the balance sheet, showing how profits are managed within the business. The formula is straightforward and applies to specific reporting periods, such as a quarter or a fiscal year.

The formula is expressed as: Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings. The result is the “Ending Retained Earnings” balance, which will then become the beginning balance for the subsequent accounting period.

Applying the Calculation with an Example

To illustrate the calculation, consider a hypothetical company, “InnovateTech Inc.,” at the end of its fiscal year. At the start of the year, on January 1, 2025, InnovateTech Inc. had accumulated $150,000 in its retained earnings account from previous periods. This figure represents its Beginning Retained Earnings.

Throughout 2025, InnovateTech Inc. generated a net income of $75,000, reflecting its profitability after all expenses and taxes for the year. However, to reward its shareholders, the company declared and paid out $20,000 in dividends during the same fiscal year. To calculate the ending retained earnings for InnovateTech Inc. as of December 31, 2025, the formula is applied directly.

Starting with the Beginning Retained Earnings of $150,000, the Net Income of $75,000 is added, resulting in $225,000. From this amount, the $20,000 in Dividends is subtracted. The calculation is: $150,000 (Beginning Retained Earnings) + $75,000 (Net Income) – $20,000 (Dividends) = $205,000 (Ending Retained Earnings). This resulting balance of $205,000 signifies the total accumulated profits that InnovateTech Inc. has kept within the business since its inception, after distributing a portion of its earnings to shareholders.