How to Calculate Retained Earnings

At the end of a busy quarter, a business owner might check the bank balance and assume there's plenty of profit to reinvest. But that number can be misleading. Some of that cash may be earmarked for unpaid bills, loan payments, inventory, or payroll. The company may have earned a solid profit but also paid out dividends to its owners. Looking at cash alone does not show how much of the business's cumulative profit has actually stayed in the company over time.

That is where retained earnings comes in. It tracks the portion of net income a business has kept rather than distributed as dividends. To calculate it, start with the previous retained earnings balance, add net income or subtract net loss, then subtract any dividends paid.

The retained earnings formula

The standard calculation is:

Ending Retained Earnings = Beginning Retained Earnings + Net Income (or Net Loss) − Cash Dividends − Stock Dividends

Workday presents this version of the formula, which separates cash and stock dividends for a clearer view of what reduced the balance: How to Calculate (and Forecast) Retained Earnings.

If a business did not issue dividends, the formula simplifies to:

Ending Retained Earnings = Beginning Retained Earnings + Net Income (or Net Loss)

Retained earnings are cumulative. They carry forward from one period to the next, so the ending balance from one period becomes the beginning balance for the next.

Understand each number before you calculate

A correct formula still produces the wrong answer if one input is wrong. Gather these figures from the company's financial statements.

Beginning retained earnings

This is the balance at the start of the reporting period. For an established business, it usually matches the ending balance from the prior period. If a company ended last year with $85,000 in retained earnings, it begins this year with $85,000. A newly formed company may start at zero because it has no prior income or losses to carry forward.

Net income or net loss

Use the bottom-line net income or loss from the income statement, not total revenue. Revenue is money earned from sales before expenses; net income is what remains after operating costs, taxes, and interest. When a company has a net loss, enter it as a negative number, since a loss reduces retained earnings.

Cash dividends

Cash dividends are payments made to shareholders or owners from company funds, and they reduce retained earnings. Do not confuse dividends with ordinary expenses like payroll, rent, or supplier payments. Those affect different accounts and are typically already reflected in net income.

Stock dividends

A stock dividend gives shareholders additional shares instead of cash. Under the Workday formula, stock dividends are also subtracted when calculating ending retained earnings. Businesses with stock-based transactions should confirm the entries with their accountant, since the presentation can vary by circumstance.

A step-by-step example

Suppose a company has these figures for the year:

• Beginning retained earnings: $120,000
• Net income: $45,000
• Cash dividends: $12,000
• Stock dividends: $3,000

$120,000 + $45,000 − $12,000 − $3,000 = $150,000

The company started with $120,000 in accumulated earnings, added $45,000 in profit, distributed $15,000 in total dividends, and ended the year with $150,000 retained.

Now consider a loss scenario. If the same company started with $120,000, reported a net loss of $20,000, and paid no dividends:

$120,000 − $20,000 = $100,000

The company still has positive retained earnings, but the balance declined because of the loss.

Where retained earnings appear on financial statements

Retained earnings usually appear in the equity section of the balance sheet. They may also appear on a separate statement of retained earnings or within the statement of shareholders' equity. A rollforward table like this one shows the movement clearly:

Item	Amount
Beginning retained earnings	$120,000
Add: Net income	$45,000
Less: Cash dividends	($12,000)
Less: Stock dividends	($3,000)
Ending retained earnings	$150,000

This format makes it easier to spot missing inputs, such as a dividend payment left out of the calculation.

An alternative way to check retained earnings

In audit contexts, retained earnings can also be derived from the accounting equation:

Retained Earnings = Total Assets − Total Liabilities − Contributed Capital

Workday identifies this as an alternative method useful for audit-related review. It works best as a cross-check rather than a replacement for the period-by-period calculation: the standard formula explains how retained earnings changed, while the balance-sheet approach verifies whether the equity accounts reconcile. This only works if the records clearly separate contributed capital (money investors put in for ownership) from retained earnings (profit the business actually earned).

What else can move the balance

The basic rollforward covers most situations, but two less common items can affect retained earnings too. Prior-period adjustments, such as correcting an accounting error found after the books were closed, are applied directly to the beginning retained earnings balance rather than run through the current year's net income. This keeps the correction from distorting the current period's reported profit.

The other item is an accumulated deficit, which is simply negative retained earnings. It happens when cumulative losses and dividends exceed cumulative profits over the company's history. A negative balance does not necessarily mean the company is in immediate trouble, but it does mean that, on a cumulative basis, more has gone out than has been earned and kept. Lenders and investors often watch this figure closely because it shows a longer-term trend that a single profitable quarter can mask.

Common mistakes to avoid

Using cash on hand instead of retained earnings. A company can have significant retained earnings but limited cash because funds went toward inventory, equipment, or other assets. It can also have cash from borrowing while retained earnings are low or negative.

Starting with revenue instead of net income. Revenue does not account for the cost of running the business. Always use net income or loss from the income statement.

Forgetting dividends. Omitting cash or stock dividends overstates ending retained earnings.

Treating owner draws as dividends without checking entity structure. A sole proprietor's draw is not recorded the same way as a corporate dividend. Use the account classification in the company's books, and check with a qualified accountant when unsure.

Mixing periods. Beginning retained earnings, net income, and dividends must relate to the same reporting cycle. Don't combine a prior year's beginning balance with only one month of current-year profit unless all inputs match that same month.

Why retained earnings matter for growth planning

Retained earnings help leaders see how much cumulative profit has stayed in the company after distributions to owners. A growing business may choose to retain more earnings to fund future needs, such as expanding operations or hiring in new markets, but the balance alone doesn't guarantee available cash. It works best alongside cash flow projections and known operating costs. Retained earnings tell the story of past profitability; cash flow planning tells you what the company can actually afford to fund next.

The bottom line

Beginning Retained Earnings + Net Income (or Loss) − Cash Dividends − Stock Dividends = Ending Retained Earnings

Keep the calculation tied to one reporting period, use net income rather than revenue, and remember that retained earnings and cash are not the same thing. With accurate records, this figure gives a clear view of how much profit a business has accumulated and kept over time.

Informational note: This article is provided for general informational purposes only and is not legal advice. It does not represent the advice or opinion of the website or organization on which it appears.