How to Find Retained Earnings on a Balance Sheet

Financial statements provide insights into a business’s financial health and performance. The balance sheet, a primary financial statement, details a company’s assets, liabilities, and equity at a precise moment in time. Retained earnings represent the accumulated profits a company has kept within the business, rather than distributing them to shareholders as dividends.

The Balance Sheet: A Financial Overview

The balance sheet is built upon the fundamental accounting equation: Assets equal Liabilities plus Equity. Assets are economic resources controlled by the business that are expected to provide future economic benefits. Liabilities represent the company’s financial obligations to external parties. Equity, also known as shareholders’ equity, signifies the residual claim on the company’s assets after all liabilities have been satisfied. Within the equity section, retained earnings reflect the portion of profits that the company has accumulated and reinvested.

Locating Retained Earnings on the Balance Sheet

Retained earnings are found within the “Equity” or “Shareholders’ Equity” section of a company’s balance sheet. This placement highlights their nature as an ownership claim on the company’s assets, rather than a liability or a direct asset. While often labeled “Retained Earnings,” this account may also appear under names like “Accumulated Earnings,” “Earnings Retained,” or occasionally as “Accumulated Deficit” if the cumulative earnings are negative. Retained earnings are listed alongside other equity accounts like “Common Stock,” which represents the value of shares issued to investors, and “Additional Paid-in Capital,” which is the amount shareholders paid above the par value of the stock. This grouping provides a comprehensive view of the capital contributed by owners and the profits kept within the business.

The Equity section of a balance sheet might appear as follows:

Common Stock
Additional Paid-in Capital
Retained Earnings
Total Shareholders’ Equity

The “Retained Earnings” line item indicates the accumulated profits. This figure is a running total of all net income the company has retained since its inception, minus any dividends paid out to shareholders.

Calculating Retained Earnings

Calculating retained earnings involves a straightforward formula: Beginning Retained Earnings + Net Income (or Loss) – Dividends = Ending Retained Earnings. The “Beginning Retained Earnings” figure is the ending balance from the prior accounting period, carrying over as the starting point for the current period’s calculation.

“Net Income” (or net loss) is derived from the company’s income statement, representing the profit generated over the current period after all expenses and taxes. This amount increases the retained earnings balance. “Dividends” refer to the portion of profits distributed to shareholders, which reduces the retained earnings balance. It is important to note that dividends are a distribution of earnings and do not impact the net income calculation itself. This calculation demonstrates how earnings flow from the income statement into the balance sheet, providing a continuous link between a company’s performance over a period and its financial position at a specific point in time.