Retained Earnings Calculator

Retained earnings is nothing but a measure of net income left after distributing the dividends to common stakeholders. In other words, we can define retained earnings as the total profits accumulated by the company from the date of its inception. 

Retained Earnings Formula

The formula to determine the retained earnings is given by the equation Retained earnings = Prior Retained Earnings + Net Income - Dividends

• • Prior retained earnings: The ending retained earnings balance existing from the earlier period in balance sheet.
  • Net Income: It is the accrual based accounting measure that tells us the profitability of a company in the income statement.
• Dividends: Dividend is issued on a per share basis in the Income statement under EPS section. Apart from this you can find the gross amount in the cash flow statement.

How to calculate Retained Earnings Step by Step?

The step by step procedure to determine the retained earnings is given below. Follow them accordingly and see if your company generated high or low profits. 

• First and foremost step is to measure the early retained earnings from the balance sheet.
• Later determine the net income and add it to the prior retained earnings in earlier step.
• Later on find out the dividends i.e both cash, stock and subtract these two from sum of prior retained earnings and net income.
• That’s it you will get the retained earnings 

Retained Earnings Examples

Example 1:

Calculate how wealthier is your company if the prior retained earnings is $4000, net income is $5000, and dividends are $1800?

Solution:

Given prior earnings = $4000

Net income = $5000

Dividends = $1800

We know the formula to calculate Retained Earnings = Prior Retained Earnings + Net Income - Dividends

Substituting the known data we have Retained Earnings = $4000+$5000-$1800

= $7200

Therefore, the retained earnings of the company for the accounting period is $7200.

Example 2:

Calculate the retained earnings of your company if the prior retained earnings is $6000, net income is $4500, and dividends are $2200?

Solution:

Given prior earnings = $6000

Net income = $4500

Dividends = $2200

We know the formula to calculate Retained Earnings = Prior Retained Earnings + Net Income - Dividends

Substituting the known data we have Retained Earnings = $6000+$4500-$2200

= $7200

Therefore, the retained earnings of the company for the accounting period is $8300.

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Common Mistakes to avoid while Calculating Retained Earnings

Below is the list of common mistakes you need to avoid while finding retained earnings. They are as follows

• Never forget to include the initial or prior retained earnings in your calculation.
• Also, don’t compare 2 companies retained earnings that belog to different categories or different age groups. This is because old companies might have great potential in terms of gaining retained earnings.

Limitations of Retained Earnings

One needs to know the certain limitations of retained earnings before calculating it. They are listed in the following fashion

• Retained earnings can be volatile sometimes asthe dividend distribution is based on the company’s management.
• In most of the cases companies follow a standard dividend policy but in some cases directors decide the dividend distribution and the amount of money to be reinvested.
• Keep in mind that high retained earnings is not always a good sign as companies tend to invest more on the growth of business than the intend one. Thus, check the present growth opportunities before framing a dividend policy.

1. What are the three components of retained earnings?

The three components of retained earnings include the beginning period retained earnings, net income, and cash, stock dividends to be paid in accounting period.

2. What causes retained earnings to increase?

The potential causes for retained earnings to increase are the companies gaining profits or through capital stock investments.

3. What is another name for retained earnings?

The other names for retained earnings include retained capital, earned surplus or accumulated earnings.

4. What is the formula to calculate retained earnings?

The formula to calculate retained earnings is given by Retained earnings = Prior Retained Earnings + Net Income - Dividends