Retained earnings formula: calculate the cumulative equity balance
Use beginning retained earnings, net income or loss, and dividends to calculate the ending balance without confusing it with cash.
By Dominic Okoye · Staff Writer
· 3 min read
The retained earnings formula is: ending retained earnings = beginning retained earnings + net income (or loss) − cash dividends − stock dividends. It is a roll-forward of cumulative profit kept in the company and reported in shareholders’ equity, rather than a measure of cash on hand.
For a period with no stock dividend, the shorter version is beginning retained earnings + net income (or loss) − cash dividends. A net loss reduces the balance.
Retained earnings formula and inputs
Retained earnings are accumulated net earnings kept by a company after dividends. The formula combines the current period’s income-statement result with a balance-sheet equity account.
- Beginning retained earnings: the retained-earnings balance at the start of the reporting period.
- Net income or loss: the current period’s profit or loss.
- Cash dividends: distributions to shareholders that reduce retained earnings.
- Stock dividends: share distributions that are separately deducted when applicable.
- Ending retained earnings: the cumulative balance after the period’s profit or loss and shareholder distributions.
Net income minus dividends calculates the amount retained during a period. The ending retained-earnings balance also includes beginning retained earnings.
Worked example: calculate retained earnings in two steps
This calculation uses BDC’s published example. It calculates the amount retained during the period, not a complete balance-sheet roll-forward, because the example does not provide beginning retained earnings.
- Sales: $10,000,000
- Variable costs: $4,000,000
- Fixed costs: $5,400,000
- Taxes: $100,000
- Dividends: $100,000
Step 1: Calculate net profit
$10,000,000 − $4,000,000 − $5,400,000 − $100,000 = $500,000 net profit.
Step 2: Calculate profit retained for the period
$500,000 net profit − $100,000 dividends = $400,000 retained for the period.
To turn that period amount into an ending balance, add beginning retained earnings. If the company started with $1,200,000 in retained earnings and paid no stock dividend:
$1,200,000 + $500,000 − $100,000 − $0 = $1,600,000 ending retained earnings.
The $400,000 period increase reconciles the balance: $1,200,000 beginning retained earnings + $400,000 retained during the period = $1,600,000 ending retained earnings.
Where the number sits, and what it does not say
Retained earnings appear in the shareholders’ equity section of the balance sheet. Companies may use earnings retained in the business for internal financing, including working capital, fixed assets, debt repayment, equipment, research and development, marketing, and growth initiatives.
The account is not interchangeable with cash. Retained earnings are cumulative earnings kept after dividends, while cash is a separate balance-sheet account.
A higher balance alone does not establish financial health. Profitability history, company age, and dividend policy affect retained earnings. Negative retained earnings can result from accumulated losses or substantial dividend payouts.
Quick model check
- Use the prior period’s ending retained earnings as the current period’s beginning balance.
- Use net income or loss for the same reporting period.
- Subtract cash dividends and stock dividends, when applicable.
- Compare the calculated ending balance with the retained-earnings line in shareholders’ equity on the balance sheet.
Keep the measurement context consistent. This corporate-accounting roll-forward should not be substituted for the IMF’s separate statistical treatment of reinvested earnings in direct-investment and national-accounts reporting.
Frequently asked questions
Where do retained earnings appear on the balance sheet?
Retained earnings appear in the shareholders’ equity section of the balance sheet. The ending balance represents cumulative earnings kept by the company after dividends.
What is the difference between net income and retained earnings?
Net income is the profit or loss for one reporting period. Retained earnings are a cumulative equity balance: beginning retained earnings plus the period’s net income or loss, less dividends.
Can retained earnings be negative?
Yes. Negative retained earnings can result from accumulated losses or large dividend payouts. Company age, profitability history, and dividend policy provide context for the balance.
Are retained earnings the same as cash?
No. Retained earnings are cumulative earnings kept after dividends and reported in equity. Cash is a separate balance-sheet account.
Sources
- Business Owner's Guide to Retained Earnings — www.blockadvisors.com
- What are retained earnings? — www.bdc.ca
- Retained Earnings | Formula, Statement & Calculation - Video — study.com
- D.16 Treatment of Retained Earnings — www.imf.org
