How to Find Change in Retained Earnings

Retained earnings represent the cumulative profits a company has earned over its entire operational history that have not been paid out to shareholders as dividends. Instead, these earnings are kept within the business, serving as an internal source of funding for various corporate objectives. This accumulated figure offers a direct view into a company’s financial discipline and its long-term strategy for reinvestment and growth. The balance of retained earnings on a company’s balance sheet signifies its capacity to generate wealth from its operations.

Understanding Retained Earnings and Its Components

The balance of retained earnings on a company’s financial statements is dynamic, fluctuating as a result of specific financial activities during an accounting period. The starting point for any analysis is the “beginning retained earnings” balance, which is the ending balance carried over from the close of the previous accounting period. This figure provides the initial equity base from accumulated profits.

The most significant factor influencing this balance is the company’s “net income” or “net loss” for the current period. Net income, representing the profit generated after all expenses are accounted for, directly increases retained earnings. Conversely, if a company incurs a net loss, where expenses exceed revenues, this will decrease the retained earnings balance.

Another direct impact on retained earnings comes from “dividends paid” to shareholders. When a company distributes a portion of its profits as cash or stock dividends, these payouts reduce the retained earnings.

Calculating the Change in Retained Earnings

Determining the change in retained earnings involves an accounting calculation that connects a company’s profitability with its policy for distributing earnings to owners. The core formula for arriving at the ending retained earnings balance for any given period is expressed as: Ending Retained Earnings = Beginning Retained Earnings + Net Income – Dividends Paid. This equation illustrates how profits contribute to increasing the retained balance while any distributions directly decrease it.

To apply this formula, one first identifies the retained earnings balance recorded at the close of the prior accounting period, which then serves as the “beginning retained earnings” figure for the current period’s calculation. Subsequently, the “net income” that the business generated during the current period, as reported on its income statement, is added to this beginning balance.

Finally, any “dividends” that were paid out to shareholders during the period are subtracted from this sum. The resulting figure from this calculation represents the “ending retained earnings” balance. The overall “change” in retained earnings is the difference between this ending balance and the initial beginning balance.

Locating the Necessary Financial Information

To perform the retained earnings calculation, individuals need to know where to find the financial figures within a company’s standard financial statements. The “beginning” and “ending retained earnings” balances are found on the company’s Balance Sheet, within the stockholders’ equity section, where it is presented as a distinct line item. For a more detailed breakdown of changes, these figures are also displayed on a dedicated Statement of Retained Earnings, which provides a period-by-period reconciliation.

The “net income” figure, which is an input for the calculation, is on the company’s Income Statement, sometimes referred to as the Statement of Operations or Profit and Loss Statement. This figure, representing the company’s profitability after all revenues and expenses for the period, is usually the last line item on this statement.

Information regarding “dividends paid” can be obtained from financial documents. The Statement of Cash Flows, under the “financing activities” section, will report the amount of cash dividends disbursed to shareholders. Companies also disclose details about their dividend distributions within the notes to the financial statements.

Interpreting the Change and Practical Insights

The resulting change in retained earnings offers insights into a company’s operational success and its strategic approach to capital management. A positive change indicates that the company earned more profit than it distributed to its shareholders as dividends. This accumulation of funds suggests the company is retaining resources for reinvestment into core operations, funding expansion projects, reducing existing debt obligations, or building a cash reserve for future opportunities.

Conversely, a negative change in retained earnings implies that the company either incurred a net loss during the period or distributed more in dividends than it generated in current profits. This situation could arise from operational setbacks, a large dividend payout, or a combination of both factors. While a negative change does not automatically signify a company in distress, especially if it aligns with a deliberate, long-term capital distribution strategy.

For instance, consider a hypothetical company that began the year with $750,000 in retained earnings. If it subsequently reports a net income of $200,000 for the year and then pays out $75,000 in dividends, its ending retained earnings would be calculated as $750,000 + $200,000 – $75,000, resulting in $875,000. The positive change of $125,000 ($875,000 – $750,000) demonstrates the company’s addition to its internal capital base. This metric is useful for investors assessing a company’s capacity for self-funded growth and understanding its dividend policy, while business owners can gauge profitability trends and evaluate reinvestment potential.