How to Find Retained Earnings in Accounting

Retained earnings are the accumulated profits a company has kept rather than distributing them as dividends. This figure reflects the portion of earnings reinvested back into operations or held for future use. Retained earnings indicate a company’s financial health and its capacity for growth and self-funding.

Understanding the Statement of Retained Earnings

The Statement of Retained Earnings details how a company’s retained earnings balance changed over a specific reporting period, such as a quarter or a year. This statement bridges the income statement and the balance sheet, showing the flow of profits and distributions. It helps stakeholders understand how profits are utilized within the business.

The statement begins with the “Beginning Retained Earnings” balance, carried forward from the end of the previous accounting period. This figure sets the baseline for the current period’s changes.

Next, the company’s “Net Income” (or net loss) for the period is added to the beginning balance. Net income, from the income statement, represents profit after all expenses and taxes. Net income increases retained earnings, while a net loss decreases it.

Following the addition of net income, any “Dividends” declared and paid to shareholders are subtracted. Dividends are distributions of a company’s profits to its owners, directly reducing the earnings retained within the business.

Finally, “Prior Period Adjustments” are factored in. These are corrections of errors from previous financial statements or changes in accounting principles. Such adjustments directly impact the beginning retained earnings balance to ensure accuracy.

The combined effect of these components—beginning balance plus net income, minus dividends, plus or minus prior period adjustments—results in the “Ending Retained Earnings” balance for the current period. This ending balance then becomes the beginning balance for the subsequent period.

Finding Retained Earnings on the Balance Sheet

While the Statement of Retained Earnings details the changes over time, the final “Ending Retained Earnings” balance is reported on a company’s Balance Sheet. The Balance Sheet presents a snapshot of a company’s financial position at a specific point in time, listing assets, liabilities, and equity.

Retained earnings are specifically located within the “Shareholders’ Equity” section of the Balance Sheet. This section represents the owners’ residual claim on the company’s assets after all liabilities have been satisfied. Retained earnings are a component of total shareholders’ equity, alongside other items like common stock and additional paid-in capital.

The inclusion of retained earnings in shareholders’ equity highlights that these accumulated profits belong to the owners, even though they are reinvested in the business rather than paid out. The retained earnings figure on the balance sheet is the cumulative amount of earnings kept by the company since its inception, net of any dividends.

Interpreting the Retained Earnings Balance

Understanding the meaning behind the retained earnings balance is just as important as knowing where to find it. This figure provides insights into a company’s financial choices and its long-term viability. It reflects a company’s history of profitability and its approach to reinvestment versus shareholder distributions.

A consistently “Positive Retained Earnings” balance generally indicates that a company has accumulated more profits than losses over its operational history and has chosen to reinvest a portion of those earnings back into the business. This accumulated surplus can be used for various purposes, such as funding expansion, purchasing new equipment, investing in research and development, or reducing debt. A growing positive balance often suggests strong profitability and financial stability, allowing the company to self-finance growth initiatives without relying heavily on external borrowing.

Conversely, a “Negative Retained Earnings” balance, often referred to as an “Accumulated Deficit,” signifies that a company’s cumulative losses and dividend payouts have exceeded its cumulative profits since its inception. This can occur if a company has experienced sustained periods of unprofitability or has paid out more in dividends than it has earned. An accumulated deficit can signal financial instability, potentially making it more challenging for the company to secure financing or attract investors.

While a negative balance is concerning, its implications depend on the company’s stage and circumstances. For instance, a startup might have an accumulated deficit in its early years as it invests heavily in growth before achieving sustained profitability. However, for an established company, a persistent accumulated deficit may indicate fundamental operational issues or an unsustainable dividend policy. Analyzing the retained earnings balance in conjunction with other financial metrics and trends over several periods provides a more comprehensive understanding of a company’s financial health.