Calculate retained earnings with this calculator easily and accurately. To calculate retained earnings for a specific period you need the beginning retained earnings, net income of the current period, and the dividends paid. Calculate retained earnings now and discover more information by reading this article.
What are the Retained Earnings?
Retained earnings represent the portion of a company’s net income that is retained instead of distributed to the shareholders as dividends. These earnings are used to fund operations, invest in new projects, or pay off debts, and they are a key component of shareholders’ equity on a company’s balance sheet.
Formula of Retained Earnings
The formula of retained earnings in accounting is,
Retained Earnings = Beginning Retained Earnings + Net Income − Dividends Paid
- Beginning Retained Earnings: The balance of retained earnings at the beginning or the ending balance of the previous accounting period.
- Net Income: The profit or loss earned by the firm during the current accounting period.
- Dividends Paid: The portion of earnings distributed to shareholders.
Example:
If a company starts the year with $50,000 in retained earnings, earns $20,000 in net income during the year, and pays $5,000 in dividends, the retained earnings at the end of the year would be:
50,000 + 20,000 − 5,000 = 65,000
This is how you can calculate ending retained earnings.
Importance of Retained Earnings
Calculating the retained earnings is very important for any joint-stock business.
- Reinvestment: Retained earnings are often reinvested to grow the business, such as purchasing equipment, research, or hiring.
- Indicator of Performance: Consistent growth in retained earnings indicates profitability and efficient financial management.
- Decrease Business Liabilities: Retained earnings can help your business avoid taking out long-term or short-term loans. They can also be used to expand the business without taking out more loans.
- Zero-cost Financing: Retained earnings are a great source of internal funding, so your company does not have to pay interest for financing.
- A positive Overview of the Firm: The retained earnings are added to the balance sheet under the stockholder’s equity. And it increases the stock value of the firm. So it gives a positive overview of the firm.
How to Calculate Retained Earnings with Assets and Liabilities?
You can calculate retained earnings using the accounting equation if you know the values of assets, liabilities, and common stock (or contributed capital). Here’s the process:
We all know that the accounting equation is, Assets = Liabilities + Equity
Here the components of equity are, Equity = Contributed Capital + Retained Earnings
So we can rearrange the equation to calculate retained earnings with assets and liabilities as follows:
Retained Earnings = Assets − Liabilities − Contributed Capital