How to calculate retained earnings

Have you ever found yourself gazing at a company’s financial statements and feeling somewhat lost as to what retained earnings actually mean? Perhaps you’re a budding entrepreneur trying to get a grasp on your startup’s financial health, or maybe you’re a student preparing for a finance exam. Whatever the case, understanding retained earnings is crucial for assessing a company’s profitability over time. In this post, we’ll break down the process of calculating retained earnings so you can gain clarity and confidence in your financial analysis.

To calculate retained earnings, use the formula: Retained Earnings = Previous Period Retained Earnings + Net Income – Dividends.

Calculating retained earnings is a straightforward process that involves a few key components. First, you need to determine the retained earnings from the previous accounting period. This figure can typically be found on the balance sheet of the previous fiscal year. Next, you will need to add the net income for the current period, which is reported on the income statement. Net income reflects the company’s total profit after all expenses, taxes, and costs have been deducted. Finally, subtract any dividends paid to shareholders during the period, as these are profits that have been distributed rather than retained within the company. By plugging these numbers into the formula–Retained Earnings = Previous Period Retained Earnings + Net Income – Dividends–you can easily calculate the retained earnings for the current period. Understanding this calculation helps you assess a company’s ability to reinvest in its operations and facilitating growth.