Formula to Calculate Retained Earnings

Retained Earnings (RE) = Beginning Period RE + Net Income (Loss) – Cash Dividend – Stock Dividend 

Where,

  • Beginning Period RE can be found in the Balance sheet under shareholders’ equity.Take Net Income / (Loss) from Profit and Loss Statement.Cash DividendCash DividendCash dividend is that portion of profit which is declared by the board of directors to be paid as dividends to the shareholders of the company in return to their investments done in the company. Such a dividend payment liability is then discharged by paying cash or through bank transfer.read more,  if paid any, can be figured out from financing activity from cash flow statements.

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Explanation

Retained Earnings is very important as it reports how the company is growing with respect to its profit.

  • An investor can make an idea through trend analysisTrend AnalysisTrend analysis is an analysis of the company’s trend by comparing its financial statements to analyze the market trend or analysis of the future based on past performance results, and it is an attempt to make the best decisions based on the results of the analysis done.read more whether the company is retaining its profit or its paying part of profits as dividends.As per the equation, Retained earnings depend upon the previous year figures.The figure may be positive or negative, depending upon inputs in the formula. If the company suffered a loss last year, then its beginning period RE will start with a negative.Similar to the second input is current year profit or loss, which may be positive or negative depending upon how the company performed.In case a company is a dividend-paying company, and hence even this could lead to negative retained earnings if the dividends paid is large.

Calculation Examples of Retained Earnings

Example #1

Below given is the financial statementFinancial StatementFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more extracted from ABC company. Do the Calculation of the Retained Earnings using the given financial statements.

Given,

  • Beginning Period Retained Earnings = $0Net Income from the Income Statement = $70,000Cash Dividend = $5,000

So, the calculation of Retained Earnings equation will be as follows –

Retained Earnings will be-

Therefore, Retained Earnings =65000

Example #2 – Colgate

Let us now calculate the retained earnings of Colgate using the formula that we learned earlier.

Below is the snapshot of shareholders’ equity items of Colgate.

Retained Earnings at the beginning period = $18.861 million

Below is the snapshot of Colgate’s Income Statement.

We note that Colgate’s Net Income is $2,441 million.

We also note that Colgate’s Dividends were $1380 during the period.

  • Ending Retained Earnings formula (2016) = Retained Earnings (2015) + Net Income (2016) – Dividends (2016)Ending Retained Earnings formula = 18,861 + 2441 – 1380 = $19,922 million

Calculator

You can use the following Retained Earnings Calculator-

Use and Relevance

  • Retained Earnings Formula calculates the current period Retained EarningRetained EarningRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more by adding previous period retained earnings to the Net Income (or loss) and then subtracting the dividends paid during the period.Whenever a company generates a surplus, it always has an option to pay a dividend to its shareholders or retain it with itself.Further, if the company is making huge profits, then its shareholders would expect regular income in the form of dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more for risking their capital.If the company expects more investment Opportunities and will earn more than its cost of capital, then it would intend to retain the funds instead of paying dividends.And if a company thinks the expected returns from opportunities will yield low returns, then it will wish to pay them as a dividend to its shareholders.Among a few factors, thoughtful consideration could be given to trends and past performance as to how efficiently retained earnings were utilized by the company while looking for long term value investments or dividend payoutsDividend PayoutsThe dividend payout ratio is the ratio between the total amount of dividends paid (preferred and normal dividend) to the company’s net income. Formula = Dividends/Net Incomeread more.

This has been a guide to the Retained Earnings Formula. Here we discuss how to calculate Retained Earnings along with practical examples and explanations. You can learn more about accounting from the following articles –

  • Shareholder’s Equity FormulaWhat is Appropriated Retained Earnings?What Is Appropriated Retained Earnings?Appropriated retained earnings are the portion of the total retained earnings that have been kept aside by the company’s board of directors to use them for a specific purpose. Thus, they are not available to be distributed as the dividends.read moreUnappropriated Retained Earnings MeaningUnappropriated Retained Earnings MeaningUnappropriated Retained Earnings are the portions of total retained earnings that have not been set aside by the company’s board of directors for the purpose of utilizing them for a specified purpose and are normally distributed as dividends to the company’s shareholders.read morePro-Forma EarningsPro-Forma EarningsPro-Forma Earnings are the company’s income determined in deviation from compliance with the Generally Accepted Accounting Principle. It does not consider non-recurring expenses like loss due to fire, restructuring expenses to create a relatively positive picture of its financial statement.read more