How to Find and Calculate Retained Earnings

Retained earnings represent accumulated profits a company has kept rather than distributing to owners. These earnings measure a company’s financial health, indicating its capacity to reinvest in operations or save for future needs. Understanding how to locate and calculate this figure helps grasp a business’s financial standing.

Locating Retained Earnings on Financial Statements

Retained earnings are found on a company’s balance sheet. The balance sheet offers a snapshot of a company’s assets, liabilities, and equity at a specific point in time. On this statement, retained earnings are listed as a line item within the shareholders’ equity section.

The Statement of Retained Earnings (or Statement of Changes in Equity) details how this figure changes over an accounting period. This statement shows the beginning balance of retained earnings, any additions or subtractions, and the ending balance. It serves to bridge the gap between the income statement and the balance sheet.

While the Income Statement (also known as the Profit and Loss Statement) does not directly show retained earnings, it is an important source for one of its key components: net income. Net income, which is the result of revenues minus expenses, is a crucial input that flows into the calculation of retained earnings.

Defining the Elements of Retained Earnings

Retained earnings represent the cumulative portion of a company’s profits not distributed to shareholders as dividends. These funds are kept within the business for purposes such as reinvestment, debt repayment, or future growth initiatives. This figure is a continuous tally of profits saved over the company’s operational history.

Two primary elements influence the balance of retained earnings. The first is net income, or net loss, which is the company’s profitability over a specific period. When a company generates net income, it increases the retained earnings balance, indicating the business earned more than its expenses. Conversely, a net loss decreases retained earnings, reflecting expenses exceeded revenues during the period.

The second element affecting retained earnings is dividends. Dividends are distributions of a company’s earnings to its shareholders, typically paid in cash or as additional shares. When a company declares and pays dividends, the retained earnings balance is reduced, as these earnings are disbursed rather than kept within the company.

Determining Retained Earnings Over Time

Calculating retained earnings involves a straightforward formula that tracks the accumulation of profits over successive periods. The formula for determining the ending retained earnings balance for a given period is: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends = Ending Retained Earnings. This calculation highlights how a company’s earnings evolve from one accounting cycle to the next.

To apply this formula, first locate the beginning retained earnings balance, which is the ending retained earnings from the previous accounting period. This figure is on the prior period’s balance sheet within the shareholders’ equity section. Next, locate the net income or net loss for the current period from the company’s income statement. A positive net income is added, while a net loss is subtracted.

Finally, identify any dividends paid to shareholders during the current period. This information is often found in the statement of cash flows or other internal records. The total amount of dividends paid, whether cash or stock, is subtracted from the subtotal to arrive at the ending retained earnings balance. This ending balance then becomes the beginning retained earnings for the subsequent accounting period, creating a continuous link across financial statements.

For example, if a company began the year with $100,000 in retained earnings, earned a net income of $50,000, and paid $20,000 in dividends, its ending retained earnings would be calculated as $100,000 + $50,000 – $20,000 = $130,000. This process helps understand the change in a company’s accumulated earnings and its capacity for future reinvestment or distributions.