What are Retained Earnings?

Retained earnings (RE) represent the cumulative amount of net income a company has earned since its inception, minus any dividends paid out to shareholders. In accounting, this figure is recorded on the balance sheet under the shareholders' equity section. It essentially reflects the profits that the company has "retained" to reinvest in its core operations, pay down debt, or fund future growth opportunities.

The Formula for Calculating Retained Earnings

Calculating your ending retained earnings for a specific accounting period is straightforward if you have the right financial data. The standard formula is:

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

By following this equation, businesses can track how much capital is being kept within the business versus how much is being distributed to owners. A high retained earnings figure often indicates a healthy, profitable company with strong reinvestment potential.

How to Use This Tool

To use our calculator, simply enter the beginning balance from your previous period's balance sheet. Then, input your net income (use a negative number for a net loss) and the total dividends distributed during the current period. Our tool will instantly compute the final figure for your financial statements.

Frequently Asked Questions (FAQs)

Can retained earnings be negative? Yes. If a company experiences significant net losses that exceed its accumulated profits, it can result in a "retained deficit" or negative retained earnings.

Are retained earnings the same as cash? No. While retained earnings represent profit, they are often tied up in assets like inventory, equipment, or accounts receivable and do not necessarily represent the liquid cash available in the bank account.

Why do investors look at retained earnings? Investors analyze this metric to understand a company's dividend policy and its ability to fund expansion without taking on additional debt.