How to Get Retained Earnings From a Balance Sheet

Retained earnings represent a fundamental aspect of a company’s financial well-being. This figure, found on a company’s balance sheet, indicates the cumulative profits a business has chosen to keep and reinvest rather than distribute to its shareholders. Understanding retained earnings offers valuable insights into a company’s past profitability and its strategies for future growth and stability. Stakeholders can assess how effectively a business manages its earnings to support ongoing operations, fund expansion, or reduce debt.

Defining Retained Earnings

Retained earnings are the accumulated net income a company has not paid out as dividends to shareholders. This portion of profit is kept within the business to finance various activities. It signifies the earnings a company has “retained” since its inception, after covering all expenses and dividend payments. This accumulation is an accounting figure reflecting ownership equity generated from past profits, not a direct cash balance.

These earnings serve as a significant source of internal financing. Businesses often use retained earnings for reinvestment in operations, such as purchasing new equipment, funding research and development, or expanding into new markets. This strategic use of profits helps a company grow without needing to borrow additional funds or issue new stock, avoiding increased interest expenses or dilution of ownership. Retaining earnings signals management’s confidence in generating future returns from these reinvestments.

The Balance Sheet Context

A balance sheet provides a snapshot of a company’s financial position at a specific point in time. It is structured around the fundamental accounting equation: Assets equal Liabilities plus Equity. This equation ensures a company’s resources are balanced by claims from external parties (liabilities) or owners (equity).

Assets represent what the company owns, including cash, accounts receivable, inventory, property, and equipment. Liabilities are what the company owes to others, such as accounts payable, loans, and deferred revenue.

The equity section, also known as shareholder’s equity or owner’s equity, represents the residual value of the company after liabilities are subtracted from assets, essentially the owners’ stake in the business. Retained earnings are a key component within this equity section, demonstrating the portion of ownership value that has been generated through accumulated profits.

Identifying Retained Earnings on the Balance Sheet

To locate retained earnings, navigate to the “Shareholder’s Equity” or “Owner’s Equity” section of the balance sheet. This section typically appears below assets and liabilities.

Within shareholder’s equity, retained earnings are usually listed as a distinct line item. While “Retained Earnings” is the most common term, variations such as “Accumulated Earnings” or “Earned Surplus” may also be used, though less frequently. The placement of retained earnings within the equity section often follows other equity accounts like common stock and additional paid-in capital.

The Calculation Behind Retained Earnings

The ending balance of retained earnings, which appears on the balance sheet, is derived through a calculation linking current financial performance to past profits. The formula for retained earnings is: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends = Ending Retained Earnings. This calculation rolls forward the retained earnings balance from one period to the next.

The “Beginning Retained Earnings” figure is the balance from the end of the previous accounting period. “Net Income” is the profit a company generates during the current reporting period, sourced from its income statement. A positive net income increases retained earnings, while a net loss decreases them. “Dividends” are distributions of profits made to shareholders, which reduce the balance. For example, if a company began the year with $100,000 in retained earnings, earned $30,000 in net income, and paid $10,000 in dividends, its ending retained earnings would be $120,000.