How to Find and Calculate Your Retained Earnings
Understand, locate, and calculate your company's retained earnings. Gain insight into this key financial metric and its importance.
Retained earnings represent a fundamental aspect of a company’s financial health, reflecting the cumulative profits a business has accumulated over time. These earnings are the portion of a company’s net income not distributed to shareholders as dividends but is instead kept within the business. Understanding how to track and calculate retained earnings offers valuable insight into a company’s capacity for internal growth, debt reduction, and overall financial stability. This financial metric helps stakeholders assess how effectively a company manages its profits and reinvests them for future development.
What Retained Earnings Represent
Retained earnings are accumulated profits held back from shareholders, rather than being paid out as dividends. This accumulation of profit serves as a significant source of internal funding for a business. Companies use these funds to reinvest in operations, such as purchasing new equipment, funding research and development, or expanding business operations. Retained earnings can also be used to pay down existing debt obligations, which strengthens the company’s financial position. A consistent increase in retained earnings suggests a profitable business that is effectively managing its finances and reinvesting in its future.
Identifying Retained Earnings on Financial Statements
Retained earnings information is found on two financial statements: the balance sheet and the statement of retained earnings. On the balance sheet, retained earnings appear as a component of shareholder equity. The balance sheet provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time.
The statement of retained earnings reconciles the beginning and ending retained earnings balances for a given period. This statement details how net income (or loss) and dividends impact the retained earnings balance. You might encounter line items labeled “Retained Earnings” or “Accumulated Earnings” when reviewing these statements.
The Retained Earnings Calculation
The calculation of retained earnings involves a straightforward formula that accounts for the beginning balance, net income or loss, and dividends. The standard formula is: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends = Ending Retained Earnings. This formula helps determine the balance in the retained earnings account at the close of an accounting period.
Beginning Retained Earnings refers to the retained earnings balance from the end of the previous accounting period. This amount carries over to become the starting point for the new period’s calculation.
Net income, or net loss, is the profit or loss generated by the company during the current reporting period. Net income increases retained earnings, while a net loss decreases them. Dividends are distributions of profits to shareholders, and these payments reduce the retained earnings balance.
For example, if a company started the year with $100,000 in retained earnings, generated a net income of $50,000, and paid out $10,000 in dividends, the ending retained earnings would be $140,000 ($100,000 + $50,000 – $10,000). This calculation provides a clear picture of how a company’s profits are managed and reinvested.