How is Retained Earnings Calculated

Retained Earnings Calculator

Calculation Results

Ending Retained Earnings: $0.00

How is Retained Earnings Calculated?

Retained earnings represent the cumulative portion of a business's profits that are kept (retained) in the company rather than distributed to shareholders as dividends. This account is found in the shareholders' equity section of the balance sheet and signifies the funds available for reinvestment in the business or for debt repayment.

The Retained Earnings Formula

The standard accounting formula for calculating the ending balance of retained earnings for a specific period is:

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

Components of the Calculation

• Beginning Retained Earnings: This is the closing balance of retained earnings from the previous accounting period (month, quarter, or year).
• Net Income (or Loss): This is the "bottom line" from the Income Statement. If the company earned a profit, it increases retained earnings. If the company incurred a loss, it decreases retained earnings.
• Dividends: These are distributions of earnings to shareholders. Both cash dividends and stock dividends reduce the amount of profit a company retains.

Realistic Example

Suppose "TechNova Solutions" starts their fiscal year 2023 with $50,000 in beginning retained earnings. Over the course of the year:

1. They generate a Net Income of $25,000.
2. The Board of Directors decides to pay out $5,000 in cash dividends to shareholders.

Using the formula:

$50,000 (Beginning) + $25,000 (Income) – $5,000 (Dividends) = $70,000 Ending Retained Earnings.

Why This Number Matters

A high retained earnings balance indicates a company has been profitable over time and has a strong capacity to fund its own growth without taking on additional debt or issuing more stock. Conversely, a negative balance (often called an "Accumulated Deficit") suggests that the company has incurred more cumulative losses than profits and dividends combined.

function calculateRE() { var beg = document.getElementById("beginningRE").value; var net = document.getElementById("netIncome").value; var div = document.getElementById("dividends").value; // Convert to floats or default to 0 var begVal = parseFloat(beg) || 0; var netVal = parseFloat(net) || 0; var divVal = parseFloat(div) || 0; // Perform Calculation var result = begVal + netVal – divVal; // Display formatting var formatter = new Intl.NumberFormat('en-US', { style: 'currency', currency: 'USD', }); var resultDisplay = document.getElementById("reResultContainer"); var resultValue = document.getElementById("reResultValue"); var resultDesc = document.getElementById("reDescription"); resultDisplay.style.display = "block"; resultValue.innerText = formatter.format(result); if (result < 0) { resultDesc.innerText = "The business currently has an accumulated deficit."; resultValue.style.color = "#c0392b"; } else { resultDesc.innerText = "The business has successfully retained profits for reinvestment or future growth."; resultValue.style.color = "#27ae60"; } // Scroll to result resultDisplay.scrollIntoView({ behavior: 'smooth', block: 'nearest' }); }