How to Calculate Retained Earnings

Calculate ending retained earnings by taking the beginning balance, adding the period’s net income or subtracting its net loss, then subtracting dividends declared for that period. This rollforward shows how accumulated profits changed after business results and distributions to owners; it does not measure cash available to spend. Use figures from the same reporting period and take net income or loss from the income statement rather than using revenue. For most businesses, ending retained earnings appears in the equity section of the balance sheet and becomes the next period’s beginning balance. Accurate dividend classifications and any prior-period adjustments also matter because omissions or errors can change the reported balance.

How to Use the Retained Earnings Formula

The standard formula is:

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

Workday’s explanation presents cash and stock dividends separately. If the business did not issue dividends, use the simpler formula:

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

Retained earnings are cumulative. The ending balance for one reporting period generally becomes the beginning balance for the next. If an applicable prior-period adjustment is recorded, the opening balance may need to be adjusted.

Which Figures Should You Use?

Gather the figures from the company’s financial records and confirm that they cover the same reporting period. A correct formula cannot compensate for an incorrect or mismatched input.

Beginning Retained Earnings

This is the retained earnings balance at the start of the period. For an established business, it usually matches the prior period’s ending balance. If the previous year ended with $85,000 in retained earnings, the next year generally begins with that amount. A newly formed business may begin at zero if it has no prior earnings or losses to carry forward.

Net Income or Net Loss

Use net income or loss from the bottom line of the income statement, not total revenue. Revenue is income from sales before expenses. Net income is what remains after expenses such as operating costs, taxes, and interest are accounted for. Enter a net loss as a negative amount because it reduces retained earnings.

Cash and Stock Dividends

Cash dividends are distributions to shareholders or owners from company funds. They reduce retained earnings, but they are not ordinary operating expenses such as payroll, rent, or supplier payments. Those expenses generally reduce net income before it is added to retained earnings.

A stock dividend gives shareholders additional shares rather than cash. The formula above subtracts stock dividends as well as cash dividends. Because accounting treatment and presentation can depend on the transaction, businesses with stock-based distributions should confirm how the transaction is recorded with their accountant.

How Do You Calculate Retained Earnings?

For example, suppose a company starts the year with $120,000 in retained earnings. It reports $45,000 in net income and distributes $12,000 in cash dividends and $3,000 in stock dividends. The calculation is:

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

The company added $45,000 in profit and distributed $15,000 in dividends, leaving ending retained earnings of $150,000. This is the cumulative balance after those changes, not a statement that $150,000 remains in the bank.

The same method accounts for a loss. If the company instead starts with $120,000, reports a $20,000 net loss, and pays no dividends, the calculation is:

$120,000 − $20,000 = $100,000

The balance remains positive, but it falls because the company incurred a loss. A business can also have negative retained earnings when cumulative losses and distributions exceed cumulative profits. Learn more about negative retained earnings.

Where Does Retained Earnings Appear?

Retained earnings usually appear in the equity section of the balance sheet. The amount may also be shown in a separate statement of retained earnings or included in the statement of shareholders’ equity. A rollforward makes the calculation and its inputs visible:

This presentation helps identify missing inputs, such as a dividend payment left out of the calculation.

How Can You Check the Balance?

Retained earnings can also be derived from the accounting equation:

Retained Earnings = Total Assets − Total Liabilities − Contributed Capital

This alternative can serve as a cross-check, including during an audit-related review. The rollforward explains how retained earnings changed during a period. The accounting-equation approach checks whether the balance sheet’s equity accounts reconcile. This check works only when the records distinguish contributed capital, which is money investors put in for ownership, from retained earnings, which represent profits the business earned and kept.

What Else Can Change the Balance?

A prior-period adjustment may change the beginning retained earnings balance. For example, a correction to an accounting error discovered after the books were closed may be applied directly to that balance rather than included in current-period net income. This keeps the correction from distorting the profit reported for the current period.

An accumulated deficit is negative retained earnings. It arises when cumulative losses and dividends exceed cumulative profits. A negative balance does not by itself establish that a business is in immediate trouble. It does show that losses and distributions have exceeded profits kept in the business over time. Lenders and investors may consider the balance alongside other financial information because a single profitable period may not reveal the longer-term pattern.

Common Calculation Mistakes

• Using cash on hand instead of retained earnings. A business may have retained earnings but little cash because it used funds for inventory, equipment, or other assets. It may also have cash from borrowing while retained earnings are low or negative.
• Using revenue instead of net income. Revenue does not account for the costs of running the business. Use net income or loss from the income statement.
• Leaving out dividends. Omitting cash or stock dividends overstates ending retained earnings.
• Classifying owner draws without checking the entity structure. A sole proprietor’s draw is not recorded in the same way as a corporate dividend. Use the classification in the company’s books and check with an accountant if it is unclear.
• Mixing reporting periods. The beginning balance, net income or loss, and dividends must cover the same reporting cycle. For example, do not combine a prior year’s opening balance with only one month of current-year profit unless all inputs are aligned to that month.

How Retained Earnings Support Planning

Retained earnings help business leaders understand how much cumulative profit has stayed in the company after distributions to owners. A business may retain earnings to support future needs such as expansion or hiring, but the balance alone does not show how much cash is available for those plans. Some earnings may have been used to acquire assets or meet other business needs. Review retained earnings alongside cash flow projections and known operating costs. Retained earnings reflect accumulated results, while cash flow planning helps assess what the business can afford to fund next.

*This article is for general informational purposes only and is not legal advice.