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What is Retained Earnings Formula?
Retained Earnings Formula calculates the current period Retained Earning by adding previous period retained earnings to the Net Income (or loss) and then subtracting the dividends paid during the period.
Retained Earnings Formula is as per below –
- Beginning Period RE can be found in the Balance sheet under shareholders’ equity
- Net Income / (Loss) can be taken from Profit and Loss Statement
- Cash Dividend if paid any can be figured out from financing activity from cash flow statement
Explanation of Retained Earnings Formula
Retained Earnings is very important as it reports how the company is growing with respect to its profit.
- An investor can make an idea through trend analysis whether the company is retaining its profit or its paying part of profits as dividends.
- As per the equation of Retained earnings is dependent upon previous year figure.
- The figure may be positive or negative depending upon inputs in the formula. If the company suffered a loss last year then its beginning period RE will start with negative.
- Similar the second input is current year profit or loss which may be positive or negative depending upon how the company performed.
- In case a company is a dividend paying company and hence even this could lead to a negative retained earnings if the dividends paid is large.
Examples of Retained Earnings Formula (with Excel Template)
Let’s see some simple to advanced examples to understand the calculation of retained earnings better.
Retained Earnings Formula – Example #1
Below given is the financial statement extract from ABC company. Do the Calculation of the Retained Earnings using the given financial statements.
- Beginning Period Retained Earnings = $0
- Net Income from the Income Statement = $70,000
- Cash Dividend = $5,000
So, we have gathered the following data for the calculation of Retained Earnings Equation.
So, the calculation of Retained Earnings equation will be as follows –
Retained Earnings will be-
Therefore, Retained Earnings =65000
Retained Earnings Formula – Colgate Example
Let us now calculate the retained earnings of Colgate using the formula that we learned earlier.
Below is the snapshot of shareholders equity items of Colgate.
Retained Earnings at the beginning period = $18.861 million
Below is the snapshot of Colgate’s Income Statement.
We note that Colgate’s Net Income is $2,441 million.
We also note that Colgate’s Dividends were $1380 during the period.
- Ending Retained Earnings formula (2016) = Retained Earnings (2015) + Net Income (2016) – Dividends (2016)
- Ending Retained Earnings formula = 18,861 + 2441 – 1380 = $19,922 million
Retained Earnings Calculator
You can use the following Retained Earnings Calculator-
|Retained Earnings Formula =||Beginning Period RE + Net Income (Loss) − Cash Dividend − Stock Dividend|
|0 + 0 − 0 − 0 =||0|
Relevance and Use of Retained Earnings Formula
- Whenever the company generates a surplus it will always have the option whether to pay a dividend to its shareholders or retain with itself.
- Further, if the company is making huge profits then its shareholder would expect regular income in form of dividend for risking their capital.
- If the company expects more investment Opportunities and will earn more than its cost of capital, then it would intend to retain the funds instead of paying dividends
- And if a company thinks the expected returns from opportunities will yield low returns then it will wish to pay them as a dividend to its shareholders.
- Among a few factors, thoughtful consideration could be given to trends and past performance as to how efficiently retained earnings were utilized by the company while looking for long term value investments or dividend payouts.
You can download this Retained Earnings Formula Excel Template here – Retained Earnings Formula Excel Template
This has been a guide to Retained Earnings Formula. Here we discuss how to calculate Retained Earnings using practical examples along with downloadable excel sheet. You can learn more about accounting from the following articles –