How to Figure Retained Earnings for Your Business
Uncover the process of determining your business's retained earnings. Understand this core indicator of accumulated profits and future growth.
Retained earnings represent the accumulated profits a business has kept rather than distributing them to owners or shareholders. This figure indicates a company’s financial strength and capacity for reinvestment and growth. It reflects the portion of net income retained within the business since its inception, after accounting for any losses and distributions. Understanding how to calculate and interpret retained earnings provides insight into a company’s financial history and strategic decisions regarding profit utilization.
Identifying the Necessary Financial Information
Calculating retained earnings requires gathering specific financial figures from a company’s accounting records. The first piece of information needed is the beginning retained earnings balance. This figure represents the accumulated profits a company had at the close of the previous accounting period. It can typically be found on the prior period’s balance sheet, within the equity section, or on a separate statement of retained earnings.
The company’s net income or net loss for the current accounting period is the next essential component. Net income signifies the profit a company has generated over a specific period, while a net loss indicates expenses exceeded revenues. This crucial figure is directly derived from the company’s income statement, often labeled as “Net Income” or “Net Loss” at the bottom of the statement.
Finally, any dividends declared and paid during the current period must be identified. Dividends represent distributions of a company’s profits to its shareholders, which reduce the amount of earnings retained within the business. Information regarding dividends can usually be found on the statement of cash flows or the statement of retained earnings for the relevant period.
Applying the Retained Earnings Formula
Once the necessary financial information is compiled, the calculation of ending retained earnings is a straightforward application of a standard formula. The formula begins with the prior period’s ending retained earnings balance, which becomes the current period’s beginning balance. To this figure, the current period’s net income is added, or a net loss is subtracted. Any dividends declared and paid during the period are then subtracted to arrive at the ending retained earnings balance.
The formula is expressed as: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends = Ending Retained Earnings. For example, if a business started the year with $150,000 in retained earnings, generated a net income of $75,000 during the year, and paid out $20,000 in dividends, its ending retained earnings would be calculated. The calculation would be $150,000 (Beginning Retained Earnings) + $75,000 (Net Income) – $20,000 (Dividends) = $205,000 (Ending Retained Earnings).
Presenting Retained Earnings on Financial Statements
The calculated ending retained earnings balance holds a specific place within a company’s financial reports. This final figure is prominently displayed on the balance sheet, specifically within the equity section. It is typically listed alongside other equity components, such as common stock and additional paid-in capital. The balance sheet presents a snapshot of the company’s financial position at a specific point in time, and retained earnings contribute to the overall equity of the business.
Reporting retained earnings on the balance sheet highlights the cumulative profits that a company has reinvested or held for future use. This accumulated figure reflects the company’s historical profitability and its past decisions regarding profit distribution versus retention. Its presence provides stakeholders with insight into how much earnings have been kept to support operations, expansion, or debt reduction.