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How to Calculate Retained Earnings?

On the asset side of a balance sheet, you will find retained earnings. This represents capital that the company has made in income during its history and chose to hold onto rather than paying out dividends.

On the balance sheet you can usually directly find what the retained earnings of the company are, but even if it doesn’t, you can use other figures to calculate the sum.

Follow these two steps to calculate your retained earnings:

  • Subtract a company’s liabilities from its assets to get your stockholder equity.
  • Find the common stock line item in your balance sheet. If the only two items in your stockholder equity are common stock and retained earnings, take the total stockholder equity and subtract the common stock line item figure. The difference is retained earnings.

There are businesses with more complex balance sheets that include more line items and numbers.

This article will also discuss:

How Do You Prepare Retained Earnings Statement?

What Makes up Retained Earnings?

How Do You Calculate Retained Earnings on the Balance Sheet?

How Do You Prepare Retained Earnings Statement?

In an accounting cycle, the second financial statement that should be prepared is the Statement of Retained Earnings. This is the amount of income left in the company after dividends are paid and are often reinvested into the company or paid out to stockholders.

Here are the steps to create a Statement of Retained Earnings:

Step 1: Prepare the Heading

There should be a three-line header on a Statement of Retained Earnings. The first line is the name of the company, the second line labels the document “Statement of Retained Earnings” and the third line stats the year “For the Year Ended XXXX”.

Step 2: State the Balance From the Prior Year

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

Hypothetically, let’ say the retained earnings for a company is $30,000. The first line of the Statement of Retained Earnings would look like this:

  • Retained Earnings, December 31, 2017 $30,000

Step 3: Add Net Income From the Income Statement

Before Statement of Retained Earnings is created, an Income Statement should have been created first. Let’s say that the net income of your company is $15,000. That is the first item added to Statement of Retained Earnings.

The Retained Earnings Statement will looks like this:

  • Retained Earnings: December 31,2017 $30,000
  • Plus: Net Income 2018 +15,000
  • Total $45,000

If the company is experiencing a net loss on their Income Statement, then the net loss is subtracted from the existing retained earnings.

Step 4: Subtract Dividends Paid Out to Investors

If your company pays dividends, you subtract the amount of dividends your company pays out of your net income. If it does not pay dividends, then you subtract $0. Let’s say your company’s dividend policy is to pay 50 percent of its net income out to its investors. In this example, $7,500 would be paid out as dividends and subtracted from the current total.

  • Retained Earnings, December 31, 2017 $30,000
  • Plus: Net Income 2018 +15,000
  • Total $45,000
  • Minus: Dividends (7,500)

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

Step 5: Prepare the Final Total

Now, if you paid out dividends, subtract them and total the Statement of Retained Earnings. You will be left with the amount of retained earnings that you post to the retained earnings account on your new 2018 balance sheet.

  • Retained Earnings, December 31, 2017 $30,000
  • Plus: Net Income 2018 $15,000
  • Total: $45,000
  • Minus: Dividends Paid ($7,500)
  • Retained Earnings, December 31, 2018 $37,500

This completes the Statement of Retained Earnings.

What Makes up Retained Earnings?

Retained Earnings are the portion of a business’s profits that are not given out as dividends to shareholders but instead reserved for reinvestment back into the business. These funds are normally used for working capital and fixed asset purchases or allotted for paying of debt obligations.

To calculate retained earnings add net income to or subtract any net losses from beginning retained earnings and subtracting any dividends paid to shareholders.

How Do You Calculate Retained Earnings on the Balance Sheet?

Retained Earnings are listed on a balance sheet under the shareholder’s equity section at the end of each accounting period. To calculate Retained Earnings, the beginning Retained Earnings balance is added to the net income or loss and then dividend payouts are subtracted.

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

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

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