Updated August 1, 2023
Retained Earnings Formula (Table of Contents)
- Retained Earnings Formula
- Examples of Retained Earnings Formula (With Excel Template)
- Retained Earnings Formula Calculator
Retained Earnings Formula
The formula for calculating Retained Earnings:
Where,
- RE: Retained Earnings
- Beginning RE: Accumulated surplus at the beginning of the financial year.
- Net Income: Balance amount left for the company after deducting the expenses such as the cost of goods sold, salary expenses, interest, taxes, depreciation & amortization from the Net Sales of the company.
- Dividend: The company pays the shareholders an amount for holding each share at the end of the financial year.
Examples of Retained Earnings Formula (With Excel Template)
Let’s take an example to understand in a better manner.
Retained Earnings Formula – Example #1
Suppose Jargriti Pvt Ltd wants to calculate the Retained earnings for this year-end. Below is the available information from the Balance sheet and income statement of Jagriti Pvt. Ltd.
For calculating Retained Earnings, we need Net Income and Dividends.
Net Income can be calculated by using the below formula:
- Net Income = $2,50,000 – $1,50,000
- Net Income = $1,00,000
Dividend can be calculated by adding Cash Dividend and Stock Dividend.
- Dividend = $1,500 + $1,500
- Dividend = $3,000
To Calculate Ending Retained Earnings, we can use the below formula:
- Ending RE = $80,000 + $1,00,000 – $3,000
- Ending RE= $1,77,000
Jargriti Pvt ltd Retained Earnings for this financial year is $ 1,77,000.
Retained Earnings Formula – Example #2
Let’s assume Anand Group of Companies has shown the following details as per its financials for the year ended 2017-18. Beginning Retained Earnings of the company is $ 200,000. The company has reported net income of $20,000. And the company is planning to issue dividends to the shareholders of $2000. Now we need to calculate the Ending Retained Earnings for Anand Group of companies for this financial year.
To Calculate Ending Retained Earnings, we can use the below formula:
- Ending RE = $ 200,000 +$20,000 – $2000
- Ending RE = $ 2,18,000
This financial year’s ending Retained Earnings for Anand Group of companies is $ 2,18,000.
Retained Earnings Formula – Example #3
Let’s assume Anand Pvt. Ltd. has begun retained earnings of $30,000 for this accounting year, and the company has shown a Net Loss of $40,000 in its income statement. Anand Pvt Ltd will not be paying a dividend for this financial year. We need to calculate the retained earnings for Anand Pvt. Ltd for the year-end.
To Calculate Ending Retained Earnings, we can use the below formula:
i.e, Ending RE = Beginning RE – Net Loss – Dividends
- Ending RE = $30,000 – $40,000 – $0
- Ending RE = -$10,000
Anand Pvt. Ltd. has a deficit of $10,000 in its business. As retained earnings are calculated on a cumulative basis, they must use -$10,000 as the beginning retained earnings for the next accounting year. Anand Pvt. Ltd has to need to generate high net income to cover up the cumulative deficits.
Explanation
Retained earnings can be calculated by using the below formula:
It basically depends on two factors Net Income and Dividends.
Net Income is the balance amount left for the company after deducting expenses such as the cost of goods sold, salary expenses, interest, taxes, depreciation & amortization from the company’s Net Sales.
The dividend can be in the form of a Cash Dividend or Stock Dividend. Total Dividend can be calculated by adding Cash Dividend and Stock Dividend.
Retained earnings figures during a specific quarter or year cannot give meaningful insight. It can only be analyzed when it is taken over a period of time, e.g. 5 years trends showing the money company is retaining over the years. Investors would be more interested in knowing how much-retained earnings the company has generated and are it better than any other alternative investments.
Relevance and Uses of Retained Earnings Formula
Retained earnings show how the company has utilized its profit over a period of time which the company has reinvested in its business since its inception. Reinvestment may be in the form of the purchase of assets or payment of any liability. However, it does not show the cash available after the payment of dividends.
It also shows the company’s dividend policy, as it shows whether the company reinvests profits or has paid a dividend to its shareholders. Retained earnings are mainly analyzed to evaluate the profits and focus on generating the shareholders’ highest return.
The requirement of retained earnings depends on the industry in which the company is working. Capital-intensive industries or any growing industries maintain higher retained earnings than other industries mainly because they require more assets for their operations and can utilize retained earnings for investment in assets. The companies that started their operations many years ago also report higher retained earnings compared to new ones. These issues can make the comparison of retained earnings more difficult. However, we can take companies of the same age and of the same industry to make the proper comparison. We can analyze a company for its dividend payouts or long-term investments by analyzing its retained earnings.
Retained Earnings Formula Calculator
You can use the following Retained Earnings Calculator
| Beginning RE | |
| Net Income(Profit or Loss) | |
| Dividends | |
| Ending Retained Earnings Formula = | |
| Ending Retained Earnings Formula = (Beginning RE + Net Income(Profit or Loss)) − Dividends |
| (0 + 0) − 0 = 0 |
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