Formula to Calculate Retained Earnings
Retained Earnings formula calculates cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company and it is calculated by subtracting the cash dividends and stock dividends from the sum of beginning period retained earnings and the cumulative net income earned.
- Beginning Period RE can be found in the Balance sheet under shareholders’ equity.
- Take Net Income / (Loss) from Profit and Loss Statement.
- Cash DividendCash DividendCash dividend is that portion of profit which is declared by the board of directors to be paid as dividends to the shareholders of the company in return to their investments done in the company. Such a dividend payment liability is then discharged by paying cash or through bank transfer., if paid any, can be figured out from financing activity from cash flow statement.
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, Retained earnings depend upon previous year figures.
- The figure may be positive or negative, depending upon inputs in the formula. If the company suffered a loss last year, then it’s beginning period RE will start with negative.
- Similar to 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.
Calculation Examples of Retained Earnings
Below given is the financial statementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. 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, the calculation of Retained Earnings equation will be as follows –
Retained Earnings will be-
Therefore, Retained Earnings =65000
Example #2 – Colgate
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
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|
Use and Relevance
- Retained Earnings Formula calculates the current period Retained EarningRetained EarningRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company. by adding previous period retained earnings to the Net Income (or loss) and then subtracting the dividends paid during the period.
- Whenever a company generates a surplus, it always has an option to pay a dividend to its shareholders or retain with itself.
- Further, if the company is making huge profits, then its shareholders would expect regular income in the form of dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company. 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 payoutsDividend PayoutsThe dividend payout ratio is the ratio between the total amount of dividends paid (preferred and normal dividend) to the company's net income. Formula = Dividends/Net Income.
This has been a guide to Retained Earnings Formula. Here we discuss how to calculate Retained Earnings along with practical examples and explanation. You can learn more about accounting from the following articles –