How to Find Retained Earnings Ending Balance?

Retained earnings represent a business’s accumulated profits not distributed to owners as dividends. Tracking this balance is important for understanding a company’s financial health, as it indicates profit reinvested into the business. This reinvestment supports growth, funds operations, or serves as a financial cushion.

Understanding Retained Earnings

Retained earnings are a component of owner’s equity on the balance sheet, reflecting profits kept in the business rather than paid to shareholders. This figure accumulates over time, representing the total net income a company has saved since inception, net of any dividends issued. It links the income statement and balance sheet, showing how profits are reinvested or distributed.

The balance of retained earnings is influenced by three primary factors. First, the beginning retained earnings balance represents accumulated profits from all prior periods, serving as the starting point for the current period’s calculation. Second, net income or loss from the current period directly impacts retained earnings; a profit increases this balance, while a loss decreases it. Third, dividends declared or paid to shareholders reduce retained earnings, as these are distributions of profits to the owners.

Calculating the Ending Balance

The calculation for the ending balance of retained earnings follows a standard formula: Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings. This formula accounts for all changes to accumulated profits over a specific period.

For example, if a business started the year with $50,000 in retained earnings and generated $20,000 in net income, its retained earnings would increase. If the company then paid $5,000 in dividends, this amount would reduce the retained earnings.

Using these figures, the calculation is: $50,000 (Beginning Retained Earnings) + $20,000 (Net Income) – $5,000 (Dividends) = $65,000 (Ending Retained Earnings). Net income is added because it increases company wealth, while dividends are subtracted as they are a payout to shareholders. This ending balance becomes the beginning retained earnings for the subsequent accounting period.

Locating Necessary Financial Data

To perform the retained earnings calculation, specific financial figures must be identified from a company’s financial statements. The beginning retained earnings balance is typically found on the balance sheet from the end of the previous accounting period, usually listed within the shareholders’ equity section.

Net income (or net loss) for the current period is located on the income statement. It is often referred to as the “bottom line” as it is the final figure after all revenues and expenses.

Information regarding dividends declared or paid is found on the statement of changes in equity or a separate statement of retained earnings. Dividends reduce retained earnings and also appear as a cash outflow in the financing activities section of the statement of cash flows. If dividends have been declared but not yet paid, they might be listed as a liability, “dividends payable,” on the balance sheet.