How to Find Ending Retained Earnings
Learn to accurately determine a company's accumulated profits, a crucial metric for understanding its financial health and reinvestment capacity.
Retained earnings represent the portion of a company’s accumulated net profits that have not been distributed to shareholders as dividends. Instead, these earnings are kept within the business to fund future operations, investments, or debt reduction. This figure offers insight into a company’s financial health, indicating its capacity for internal growth and its ability to reinvest profits. A growing retained earnings balance can signal a financially sound company with a strong foundation for future expansion.
Identifying the Components
Determining a company’s ending retained earnings requires gathering three specific financial figures from its financial statements. Understanding where to locate these figures is the first step in the process.
Beginning retained earnings represents the accumulated profits a company has held onto from all prior periods, up to the start of the current accounting period. This figure is typically found on the company’s balance sheet from the previous year-end, often listed within the equity section. Alternatively, it serves as the starting balance on the statement of retained earnings for the current period.
Net income, or net loss, reflects a company’s profitability over a specific accounting period, such as a quarter or a year. This figure is calculated by subtracting all expenses, including taxes and other costs, from total revenues. A positive net income increases retained earnings, while a net loss decreases them.
Dividends are distributions of a company’s profits to its shareholders. Dividends are not considered an expense and therefore do not appear on the income statement. Instead, information about dividends paid can be found on the statement of retained earnings or the statement of cash flows, specifically within the financing activities section. When declared but not yet paid, dividends may appear as a liability on the balance sheet.
Performing the Calculation
Once the necessary financial components are identified, calculating the ending retained earnings involves a straightforward application of a standard accounting formula. This calculation provides the final retained earnings balance for the current accounting period, which then appears on the company’s balance sheet.
The formula for calculating ending retained earnings is: Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings. This equation systematically adjusts the prior period’s accumulated earnings for current period profitability and distributions to shareholders.
To apply the formula, begin with the identified beginning retained earnings balance. Add the net income generated during the current period to this starting balance. If the company incurred a net loss, this amount would be subtracted instead of added. Finally, subtract any dividends that were paid out to shareholders during the period from the adjusted balance.
Consider a hypothetical example: A company starts the year with $100,000 in beginning retained earnings. During the year, it earns a net income of $50,000. The company’s board of directors decides to pay out $10,000 in dividends to its shareholders. Using the formula, the calculation would be $100,000 (Beginning Retained Earnings) + $50,000 (Net Income) – $10,000 (Dividends) = $140,000 (Ending Retained Earnings). This resulting $140,000 is the final retained earnings balance for the period.