How to calculate retained earnings

Translated from English, retained earnings (Retained Earnings) means the portion of net income that is not used to pay dividends. This part acts as an investment in your own business or to pay off a company's debt. In the lines of the balance sheet, retained earnings are indicated under the "Equity" column.

Instruction manual

1

Calculation of retained earnings is very simple, just substitute the values ​​in one of the following formulas and know the amount of net profit / loss of the company.

2

In order to calculate retained earnings, knowledge of the following indicators is required: retained earnings at the beginning of a given period, net profit (Net Income or Net Profit) or net loss (Net Loss) and the amount of dividends paid.

3

Having collected all the data for the calculations, substitute the values ​​in the following formula:

RE1 = RE0 + Net Income - Dividends, where RE1 / RE0 - retained earnings at the end / beginning of this period;

Net Income - net profit;

Dividends - Dividends paid to shareholders.

4

If the company in the current period received not net profit, but rather a net loss, then the calculation is carried out according to the following formula:

RE1 = RE0 - Net Loss - Dividends, where, as it became clear, Net Loss is a net loss.

note

When the net loss for a given period of time is greater than retained earnings for the same period, the amount of retained earnings may be negative, which will create a deficit.

Useful advice

Often, many firms use the net profit of their enterprise as an investment tool to generate additional income. Such areas may include the purchase of innovative equipment, the implementation of investment projects, and even the conduct of scientific research.

The retained earnings account must always be adjusted when the income and expense account is changed by adding a new record.

The English term Retention Ratio (or Retained Surplus) also refers to retained earnings, but is known as the “retention ratio”.

Only the owners of the company make decisions through the general meeting of shareholders or participants on the distribution of profits.

Account 84 "Retained earnings (uncovered loss)"