How to Find Retained Earnings From Balance Sheet

Financial statements provide a snapshot of a company’s financial health and performance, offering insights into its assets, liabilities, equity, revenues, and expenses. Understanding these statements helps gauge operational efficiency and financial stability. This article guides readers through understanding, locating, and calculating retained earnings, a key component of a company’s financial picture, directly from a balance sheet.

Understanding Retained Earnings

Retained earnings represent the accumulated profits a company has generated that have not been distributed to its shareholders as dividends. These earnings are retained within the business, reflecting the company’s past profitability.

These retained funds are a significant internal source of financing for a company’s future growth. Businesses often reinvest these earnings into expanding operations, developing new products, or acquiring other companies. They can also be used to reduce outstanding debt, strengthening the company’s financial structure. This reinvestment strategy aims to increase the company’s value and future earning potential.

Locating Retained Earnings on the Balance Sheet

Retained earnings are found within the “Shareholders’ Equity” section of a company’s balance sheet. This section represents the residual interest in the assets of the entity after deducting liabilities.

Within the shareholders’ equity section, retained earnings typically appear as a single line item. It is commonly listed alongside other equity accounts such as common stock and additional paid-in capital. The balance sheet presents a company’s financial position at a specific point in time.

Calculating Retained Earnings

Calculating the ending balance of retained earnings for a given period involves a formula that considers the company’s financial performance and dividend distributions. The calculation begins with the retained earnings balance from the previous accounting period. This “beginning retained earnings” figure is directly sourced from the prior period’s balance sheet.

The next component is the company’s net income or net loss for the current accounting period. This figure is obtained from the income statement, which reports a company’s revenues and expenses over a specific period, such as a fiscal quarter or year. A positive net income increases retained earnings, while a net loss decreases them.

Dividends paid to shareholders during the period represent a distribution of company profits and thus reduce retained earnings. Information on dividends paid can be found on the Statement of Cash Flows, specifically within the financing activities section, or on the Statement of Changes in Equity. For instance, if a company had $500,000 in beginning retained earnings, earned $150,000 in net income during the year, and paid out $40,000 in dividends, its ending retained earnings would be calculated as $500,000 + $150,000 – $40,000, resulting in $610,000. This ending balance then becomes the beginning retained earnings for the subsequent accounting period.