How to Calculate the Ending Balance of Retained Earnings

Retained earnings represent the accumulated portion of a company’s net income not distributed to shareholders as dividends. Instead, these earnings are kept within the business, often reinvested to support operations, fund growth, or strengthen financial stability. Understanding how to calculate retained earnings offers insight into a company’s financial health and its strategy for utilizing profits, reflecting its reinvestment capacity and long-term financial resilience.

Key Components of Retained Earnings

The calculation of retained earnings relies on specific financial figures. The starting point is the beginning retained earnings balance, representing accumulated earnings from all prior accounting periods. This figure is typically found in the shareholders’ equity section of the company’s previous balance sheet.

Another essential component is the net income or net loss for the current accounting period. Net income is the profit a company generates after all expenses, including taxes, are deducted from revenue. A net loss occurs when expenses exceed revenues. This amount, obtained from the company’s income statement, directly impacts retained earnings: net income increases the balance, while a net loss decreases it.

Dividends paid to shareholders also play a role. Dividends are distributions of a company’s profits to its owners, either as cash or additional shares. When a company pays dividends, it reduces the earnings retained, directly lowering the retained earnings balance.

The Retained Earnings Formula

The standard formula for determining the ending balance of retained earnings systematically combines these key components. The formula is expressed as: Ending Retained Earnings = Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends. This equation provides a clear roadmap for tracking how accumulated profits change over an accounting period.

Applying the formula begins with the beginning retained earnings, which serves as the base amount carried over from the prior period’s financial statements. The net income for the current period is then added to this beginning balance. This addition reflects the increase in accumulated earnings resulting from the company’s profitable operations during the period.

If the company experienced a net loss instead of a net income, that loss is subtracted from the beginning retained earnings. A net loss indicates that the company’s expenses surpassed its revenues, thereby reducing its overall accumulated earnings. Finally, any dividends distributed to shareholders during the period are subtracted, as these payments represent a reduction in the earnings kept within the business.

Illustrative Calculation Examples

To demonstrate the practical application of the retained earnings formula, consider a company that begins the year with $150,000 in retained earnings. During the year, this company generates a net income of $70,000 and pays out $20,000 in dividends to its shareholders. Applying the formula, the ending retained earnings would be calculated as $150,000 (Beginning Retained Earnings) + $70,000 (Net Income) – $20,000 (Dividends). This results in an ending retained earnings balance of $200,000.

In a different scenario, imagine a company starting with $120,000 in retained earnings. Over the accounting period, this company experiences a net loss of $30,000 and distributes $10,000 in dividends. Using the formula, the calculation would be $120,000 (Beginning Retained Earnings) – $30,000 (Net Loss) – $10,000 (Dividends). This calculation yields an ending retained earnings balance of $80,000, reflecting the impact of the loss and dividend distribution.