Retained Earnings – A Guide with Definition, Formula, Calculations & Examples
You all might know that retaining earnings will represent a part of your business’s net income, which will not be paid out as dividends. It means that money will be placed into a ledger account till it has been used for the company’s reinvestment or for paying future dividends.
This blog will discuss what retained earnings in accounting are and how you will calculate them. Of course, we will also illustrate with examples.
Let us first learn what retained earnings mean.
What are Retained Earnings?
Retained Earnings mean the amount of a firm’s net income that has been left over after their paid dividends to distributors or investors. The leftover amount will be what the company will retain. Retained Earnings can be known as Accumulated Earnings or Inappropriate Profit Earnings Surplus.
Retained Earnings will determine whether a firm is indeed profitable.
The Formula for Retained Earnings
The formula for retained earnings is pretty simple.
Retained Earnings = Current Retained Earnings + Profit or Loss – (Dividends)
Retained Earnings = Beginning Retained Earnings + Net Profit/Loss – (Dividends)
You can prefer either of the formulas to calculate retained earnings.
How to Calculate Retained Earnings?
There are two methods available to calculate the retained earnings.
- One is by using online accounting software and
- Another is a manual calculation
The online accounting software will help to calculate retained earnings when your business statements are generated.
If you prefer manual calculation, then you will need to figure out three variables which are:
- Present or beginning retained earnings, which will be last calculated retained earnings balance
- Net profit or net loss that can be extracted from your income statement for the current accounting period
- Dividends that are distributed at present fetched from the firm’s profit
These three variables have to be figured out to calculate the retained earnings manually.
Retained Earnings – An Example
Here, you can have retained earnings examples for a better picture.
Let us consider that a company started on February 1st, 2020. The retained earnings balance at that time will be ₹0 since you will have no earnings to include. Suppose we assume that January’s earnings in net income were ₹2000 without issuing the dividends. Then on March 1st, your company’s retained earnings will be ₹2000.
If we are putting the values as mentioned above in the retained earnings equation, we will get
₹0 + ₹2000 – ₹0 = ₹2000.
You might have earned ₹2000 and retained each of them, which will become your retained earnings.
How to Calculate Retained Earnings On Balance Sheet?
So, coming to how to calculate the retained earnings on a balance sheet, please follow the upcoming steps. For calculating retained earnings, subtract the liabilities of a company from its assets. It will give you the stockholder equity. Then find out the common stock line item mentioned in your balance sheet.
After that, you can take your total stockholder equity. Finally, subtract the common stock line item number. It would be applicable only if two items in the stockholder equity were retained earnings and common stock. The difference obtained from subtracting the total stockholder equity and common stock line item figure will be retained earnings.
On the balance sheet, you shall directly find what the retained earnings of your company will be.
Finally, within the balance sheet, the retained earnings can be reflected inside the firm’s equity. They shall be calculated at an accounting period end. An increase or decrease in that shall result from net income and dividends paid during that period.
Keep track of your firm’s financial health by calculating your total profit and revenue. It will support and offer commercial success for your firm in the long run.