How to Use Retained Earnings

  1. Enter your Retained earnings
  2. Add the company's net income
  3. Enter the dividends paid by the company

Retained Earnings


How to calculate Retained Earnings

Retained earnings formula: Your beginning retained earnings + net income - dividends

Example 1:
  • Find your retained earnings, if you do not have any retained earnings use $0 , we will use $5,000 as an example.
  • Add the company's net income to your retained earnings. Let's say net income is $3,000. Now the total is $5,000 + $3,000 = $8,000
  • Subtract the dividends paid by the company, if the dividends were $3,000, Then the retained earnings is equal to $8,000 - $3,000 = $5,000.
Example 2:
  • Our current retained earnings is $500 as we invested most of it back into the company.
  • The company's net income was $12,000 . We then add this to our retained earnings $500 + $12,000 = $12,500
  • We are paying $1,000 in dividends as we want to reinvest most of it back into the company, therefore : $12,500 - $,1000 = $11,500
It is possible for a company to have negative retained earnings as not everything always goes to plan. It can be caused by thins such as a large distribution of a large dividend or an occurrence of large losses.

Retained Earnings is the money earned by a company that is not used for expenses or dividends. Instead is it kept for reinvestment's into the business, asset purchases, working capital or to pay of any debt. Retained Earnings are reported on the balance sheet under the shareholders equity.

When a company has large retained earnings balance, it is a sing of a financially strong company/organization. If a company has had more losses or it has dispersed more dividends then its retained balance, the overall balance for retained earnings will be negative. This is often referred to as Accumulated deficit.

Generally if the company is a start-up or growing it avoids dividend payments, this is so they can use the retained earnings to put back into the business such as research, development, marketing and acquisitions. In turn this helps the company's growth. Retained earnings can also be kept for a rainy day such as a lawsuit or any future losses.

Retained Earnings are reported at the end of each accounting period as the accumulated income from the previous year + current years income minus dividends paid to shareholders.

Net Income

Net Income directly affects retained earnings with any loss or gain.. Example of what effects net income is sales revenue, Cost of goods sold, depreciation, taxes and interest.

Dividends

Dividends may be in stock or cash, either one reduces retained earnings, the more dividends distributed the less earnings retained.This in turn reduces the company's balance sheet.