Retained Earnings Formula

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.

Retained Earnings (RE) = Beginning Period RE + Net Income (Loss) – Cash Dividend – Stock Dividend

 Where,

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For eg:
Source: Retained Earnings Formula (wallstreetmojo.com)

Explanation

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

You can download this Retained Earnings Formula Excel Template here – Retained Earnings Formula Excel Template

Example #1

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.read more extract from ABC company. Do the Calculation of the Retained Earnings using the given financial statements.

Given,

  • 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 –

re formula example 1.5

Retained Earnings will be-

re formula example 1.6

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 - Colgate 1

Retained Earnings at the beginning period = $18.861 million

Below is the snapshot of Colgate’s Income Statement.

Retained Earnings - Colgate 2

We note that Colgate’s Net Income is $2,441 million.

We also note that Colgate’s Dividends were $1380 during the period.

Retained Earnings - Colgate 3
  • Ending Retained Earnings formula (2016) = Retained Earnings (2015) + Net Income (2016) – Dividends (2016)
  • Ending Retained Earnings formula = 18,861 + 2441 – 1380 = $19,922 million

Calculator

You can use the following Retained Earnings Calculator-

Beginning Period RE
Net Income (Loss)
Cash Dividend
Stock Dividend
Retained Earnings Formula =
 

Retained Earnings Formula = Beginning Period RE + Net Income (Loss)Cash DividendStock Dividend
0 + 000 = 0

Use and Relevance

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