How to Get Beginning Retained Earnings
Uncover how to pinpoint a company's initial retained earnings. Master this key financial figure for precise analysis of a business's accumulated profits.
Financial statements offer a comprehensive view of a company’s financial health and performance. Among the various components within these statements, retained earnings stands out as an important element. Understanding how to identify and calculate key financial figures, such as beginning retained earnings, is fundamental for financial analysis.
Understanding Retained Earnings
Retained earnings represent the accumulated net income of a company since its inception, after accounting for any dividends paid to shareholders. This figure is an indicator of a company’s profitability and its capacity to reinvest in its operations.
These earnings are found on the balance sheet, which is a snapshot of a company’s financial position. Within the balance sheet, retained earnings are listed under the owner’s equity or shareholder’s equity section. This placement highlights its role as a component of the ownership claims on the company’s assets. A healthy balance in retained earnings indicates a financially stable business with funds available for future growth or debt reduction.
The Relationship Between Beginning and Ending Balances
Retained earnings balances are dynamic, changing from one accounting period to the next through a mathematical relationship. The formula is: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends = Ending Retained Earnings. This equation demonstrates how a company’s accumulated earnings are affected by its financial activities over a period.
The net income, derived from the income statement, represents the company’s profitability for the current period. Dividends are distributions of profits to shareholders. The ending retained earnings balance from one accounting period becomes the beginning retained earnings balance for the subsequent period. This continuity ensures tracking of accumulated profits.
Locating Beginning Retained Earnings
To ascertain the beginning retained earnings for any current accounting period, the most direct approach involves consulting the financial statements from the immediately preceding period. Since retained earnings accumulate cumulatively, the ending balance from the prior fiscal year or quarter directly carries over. Specifically, one should look for the “Ending Retained Earnings” balance on the balance sheet of the previous period.
Alternatively, a separate Statement of Retained Earnings, if prepared by the company, will explicitly show the “Retained Earnings, End of Period” figure from the prior reporting cycle. This ending balance is precisely the current period’s beginning balance. This method simplifies the process, as the necessary figure is already calculated and presented in the historical financial reports.
Starting a New Business
A unique situation arises when considering a newly established business. For the very first accounting period of a new company, the beginning retained earnings balance will always be zero. This is because there is no prior history of accumulated earnings or losses to carry forward. A new business has not yet generated any profits or incurred losses that would affect this balance, and no dividends would have been paid.