How to calculate Retained Earnings?

To calculate retained earnings, subtract a company's liabilities from its assets to obtain stockholder equity, then locate the common stock line item on your balance sheet and multiply the total stockholder equity by the figure for the common stock line item (if the only two items in your stockholder equity are common stock and retained earnings).

Retained earnings are found on the asset side of a balance sheet. This represents capital that the company has earned and chosen to keep rather than pay out dividends over its history.

You can usually find the company's retained earnings on the balance sheet, but if it doesn't, you can calculate the sum using other figures.

To calculate your retained earnings, follow these two steps:

To calculate stockholder equity, subtract a company's liabilities from its assets.

In your balance sheet, look for the common stock line item. Take the total stockholder equity and subtract the common stock line item figure if the only two items in your stockholder equity are common stock and retained earnings. The difference is made up of retained earnings.

There are companies that have more complex balance sheets with more line items and numbers.

What Is a Retained Earnings Statement?

The Statement of Retained Earnings is the second financial statement that should be prepared in an accounting cycle. This is the amount of income remaining in the company after dividends are paid, which are frequently reinvested in the company or distributed to stockholders.

The following are the steps for creating a Statement of Retained Earnings:

Step 1: Create a heading

A three-line header should appear on a Statement of Retained Earnings. The first line is the company name, the second line is the document's title "Statement of Retained Earnings," and the third line is the year "For the Year Ended XXXX."

Step 2: State the previous year's balance.

The balance of retained earnings from the previous year, which can be found on the prior year's balance sheet, should be the first item listed on the Statement of Retained Earnings.

Assume a company's retained earnings are $30,000 in this example. The first line of a Statement of Retained Earnings would be as follows:

$30,000 in Retained Earnings as of December 31, 2017.

Step 3: From the Income Statement, add Net Income.

An Income Statement should have been created before the Statement of Retained Earnings. Assume your company's net income is $15,000 per year. That is the first item that has been added to the Statement of Retained Earnings.

This is how the Retained Earnings Statement will look:

Earnings Retained: $30,000 as of December 31, 2017.
In addition, net income increased by $15,000 in 2018.
$45,000 in total

If the company has a net loss on its income statement, the net loss is deducted from the existing retained earnings.

STEP 4: DEDUCT DIVIDENDS PAID TO INVESTORS

If your company pays dividends, you deduct the amount of dividends paid from your net income. If it does not pay dividends, you deduct $0. Assume your company's dividend policy is to distribute 50% of its net income to shareholders. In this case, $7,500 in dividends would be paid out and deducted from the current total.

Retained Earnings as of December 31, 2017: $30,000 +: Net Income 2018: +15,000
Dividends deducted from total of $45,000 (7,500)

Dividends, whether paid or not, are a debit in the retained earnings account.

STEP 5: WORK ON THE FINAL TOTAL

Subtract any dividends you paid out and total the Statement of Retained Earnings. You will be left with the amount of retained earnings that you post to your new 2018 balance sheet's retained earnings account.

$30,000 in Retained Earnings as of December 31, 2017.
Plus: 2018 Net Income: $15,000
$45,000 in total
Dividends paid ($7,500) minus
Earnings Retained as of December 31, 2018: $37,500
This brings the Statement of Retained Earnings to a close.

What Constitutes Retained Earnings?

Retained Earnings are the portion of a company's profits that are not distributed as dividends to shareholders but are instead reinvested back into the company. These funds are typically used for working capital and fixed asset purchases, as well as debt repayment.

To calculate retained earnings, add net income to beginning retained earnings and subtract any dividends paid to shareholders.

How Do You Calculate Balance-Sheet Retained Earnings?

At the end of each accounting period, retained earnings are listed on a balance sheet under the shareholder's equity section. To calculate Retained Earnings, add the beginning Retained Earnings balance to the net income or loss, then subtract dividend payouts.

The formula for posting Retained Earnings on a balance sheet is:

Earnings Retained = Starting Period Earnings Retained + Net Income/Loss – Cash Dividends – Stock Dividends

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