How to Find the Balance of Retained Earnings

Retained earnings represent accumulated profits a company has held onto, rather than distributing them as dividends. This financial figure is a component of a company’s equity, reflecting profits reinvested or set aside for future use. Understanding the balance of retained earnings provides insight into a company’s financial health and its capacity for growth and future investments. This article guides you through locating and calculating this balance.

Identifying Key Financial Information

Before calculating the current balance of retained earnings, gather specific financial figures from a company’s financial statements. The first required information is the beginning retained earnings balance. This figure represents accumulated profits from the previous accounting period and serves as the starting point for the current period’s calculation. Find this amount on the company’s prior period Balance Sheet within the equity section, or on the Statement of Retained Earnings or Statement of Changes in Equity.

Another figure to identify is the company’s net income or net loss for the current accounting period. Net income signifies profit generated after accounting for all expenses, including taxes, over a specific timeframe, often a quarter or a year. Conversely, a net loss indicates expenses exceeded revenues during that same period. This information is available on the company’s Income Statement for the current reporting period.

Finally, determine the amount of dividends declared by the company during the current period. Dividends represent distributions of a company’s profits to its shareholders. Only dividends declared, rather than necessarily paid, are relevant for this calculation, as the declaration creates a liability. Details regarding dividends declared can be found within the Statement of Retained Earnings, the Statement of Changes in Equity, or in the footnotes accompanying the financial statements.

Applying the Retained Earnings Formula

Once you have identified the necessary financial figures, apply them to the retained earnings formula to determine the current balance. The formula for calculating the ending balance of retained earnings is: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends Declared = Ending Retained Earnings. This equation accounts for changes in a company’s accumulated profits over a specific period.

To illustrate, consider a hypothetical example. If a company reported a beginning retained earnings balance of $100,000, this figure serves as the initial component of the calculation. Next, assume the company generated a net income of $50,000 during the current accounting period. This profit increases accumulated earnings, so it is added to the beginning balance.

Continuing with this example, if the company declared $20,000 in dividends to its shareholders during the same period, this amount must be subtracted. The distribution of profits to owners reduces earnings retained within the business. Therefore, the calculation becomes $100,000 (Beginning Retained Earnings) + $50,000 (Net Income) – $20,000 (Dividends Declared).

Performing this calculation yields an ending retained earnings balance of $130,000. This final figure represents the accumulated profits the company has kept within its operations. This balance then becomes the beginning retained earnings for the subsequent accounting period.