Math
How to Calculate Retained Earnings: The Ultimate Formula Guide
Author:
Nicole Hardy
Jul 1, 2025
10 min
Table of contents
- How to Calculate Retained Earnings
- How to Calculate Beginning Retained Earnings
- How to Calculate Retained Earnings on Balance Sheet
- How to Calculate Ending Retained Earnings
- How to Calculate Addition to Retained Earnings
- How to Calculate Retained Earnings with Assets and Liabilities
- How to Calculate Retained Earnings from Balance Sheet
- How to Calculate Change in Retained Earnings
- Percentage Calculator for Retained Earnings Analysis
- How to Calculate Retained Earnings Balance Sheet Impact
- How to Calculate the Retained Earnings for Financial Analysis
- How to Calculate Retained Earnings in Balance Sheet Preparation
- How to Calculate Retained Earnings at the End of the Year
- Conclusion
Understanding how to track and calculate your business’s profits is essential for financial planning and growth assessment. One key financial metric that often confuses business owners is retained earnings. With just a basic calculator and some financial statements, you can determine this important figure that represents your company’s accumulated profits after dividends are paid out.
How to Calculate Retained Earnings
Profits earned by a company may be paid out as dividends or kept to support ongoing operations and growth. The portion that is kept becomes retained earnings, and calculating it is relatively straightforward:
Retained Earnings = Beginning Retained Earnings + Net Income - Dividends
This calculation relies on three key components:
- The amount of retained earnings brought forward from the previous accounting period
- The company’s profit or loss recorded during the current timeframe
- Payouts made to shareholders through dividend payments
How to Calculate Beginning Retained Earnings
Beginning retained earnings are taken from the ending balance recorded in the previous reporting period. For newly established companies, this figure starts at zero. For ongoing operations, check your previous financial statement for this figure, which serves as your starting point for the current period’s calculation.
How to Calculate Retained Earnings on Balance Sheet
On the balance sheet, retained earnings are listed within the shareholders’ equity section. To compute this figure, follow these steps:
- Locate the previous period’s retained earnings (often the last line item in the shareholders’ equity section)
- Start by adding the net income shown on the income statement
- Then subtract any dividends that were paid out during the same period
Understanding how to calculate retained earnings on a balance sheet helps analysts evaluate a company’s approach to reinvestment and long-term financial stability.
How to Calculate Ending Retained Earnings
Calculating ending retained earnings is critical for preparing accurate financial statements. Apply this formula to calculate the amount:
Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends
This figure will become the beginning retained earnings for the next accounting period, creating a continuous financial narrative of your company’s profit retention strategies.
How to Calculate Addition to Retained Earnings
When a company’s net income is greater than the dividends paid, the difference increases retained earnings. This amount is added to the company’s reserves. To calculate the addition:
Addition to Retained Earnings = Net Income - Dividends
If a company earned $100,000 in net income and paid $30,000 in dividends, the addition to retained earnings would be $70,000.
How to Calculate Retained Earnings with Assets and Liabilities
You can also determine retained earnings by applying the basic accounting equation:
Assets = Liabilities + Shareholders’ Equity
Since retained earnings are part of shareholders’ equity, you can rearrange this to:
Retained Earnings = Total Assets - Total Liabilities - (Share Capital + Additional Paid-in Capital)
This method provides a useful cross-check when verifying your retained earnings calculations.
How to Calculate Retained Earnings from Balance Sheet
To identify retained earnings directly from the balance sheet:
- Identify total shareholders’ equity
- Subtract share capital and additional paid-in capital
- Subtract any treasury stock
- Subtract amounts listed under other comprehensive income and accumulated OCI
What remains is the retained earnings balance.
How to Calculate Change in Retained Earnings
Tracking the shift in retained earnings over time offers insight into a company’s earnings retention and dividend practices. To find this change:
Change in Retained Earnings = Ending Retained Earnings - Beginning Retained Earnings
A positive change indicates the company is retaining more profits, while a negative change suggests either operating losses or significant dividend distributions.
Percentage Calculator for Retained Earnings Analysis
Using a percentage calculator can help you analyze retained earnings in relation to other financial metrics. For example, you might calculate:
- Retained earnings as a percentage of total equity
- Year-over-year percentage change in retained earnings
- Percentage of net income retained versus distributed as dividends
These percentages can reveal trends in your company’s financial strategies and help with comparative analysis against industry benchmarks.
How to Calculate Retained Earnings Balance Sheet Impact
Retained earnings directly affect the balance sheet by:
- Increasing shareholders’ equity when positive
- Potentially decreasing shareholders’ equity when negative (called accumulated deficit)
- Affecting important financial indicators such as return on equity
Understanding the balance sheet impact helps business owners recognize how profit retention decisions affect their company’s financial position.
How to Calculate the Retained Earnings for Financial Analysis
When conducting financial analysis, calculating retained earnings helps evaluate:
- A company’s self-funding capabilities
- Long-term solvency and financial stability
- Management’s approach to balancing growth investments and shareholder returns
This calculation provides context for other financial metrics and supports data-driven decision-making by investors and managers.
How to Calculate Retained Earnings in Balance Sheet Preparation
As part of closing out the reporting cycle, calculating retained earnings is among the final steps in assembling the balance sheet. The process involves:
- Finalizing the income statement to determine net income
- Confirming dividend declarations for the period
- Applying the retained earnings formula
- Recording the final amount under shareholders’ equity
Accountants must ensure this figure reconciles with other financial statements to maintain accuracy.
How to Calculate Retained Earnings at the End of the Year
Year-end retained earnings calculations are particularly important for annual reporting and tax purposes. The process involves:
- Calculating total annual net income
- Accounting for all dividends distributed throughout the year
- Making corrections for previous period inaccuracies or updates in accounting methods
- Calculating the ending balance of retained earnings
This amount then carries forward as the opening balance for retained earnings in the following fiscal year.
Conclusion
Understanding how to calculate retained earnings is fundamental to tracking your business’s financial health and growth trajectory.
