How to Calculate Retained Earnings (Formula, Example, and Tips)

Retained earnings are the share of a company profit that has been kept inside the business rather than paid out to owners. Over time this figure tells a clear story: is the company building up a cushion and funding its own growth, or is it returning cash to shareholders or even losing money? Learning how to calculate retained earnings takes only a single formula, but understanding what each piece means is what makes the number useful for decisions.

This guide walks through the formula term by term, works a full example as numbered steps, gives you a reference table and a side by side comparison, and lists the mistakes that most often produce a wrong balance. By the end you will be able to pull three numbers from a set of financial statements and land on the correct figure every time.

The retained earnings formula

The retained earnings formula is short and it appears on the statement of retained earnings, one of the core financial statements defined under Generally Accepted Accounting Principles (GAAP). Written out, it looks like this:

Each term has a specific meaning, and getting them right is the whole job:

• Beginning retained earnings is the ending balance carried over from the previous accounting period. For a brand new company this starts at zero.
• Net income is the profit for the current period, taken from the bottom line of the income statement. If you are not sure how this is found, see our guide on how to calculate net income.
• Dividends paid are the cash or stock distributions made to shareholders during the period. If no dividends were paid, this term is simply zero.

Notice that net income is added and dividends are subtracted. A profitable year that pays no dividends pushes retained earnings up by the full amount of profit. A loss, called a net loss, is a negative net income, so it lowers the balance. This is why the figure is cumulative: it is a running total of every dollar the business has earned and kept since it opened.

A worked example, step by step

Imagine a small company, Maple Goods Inc., closing out its fiscal year. Last year it ended with 120,000 dollars in retained earnings. This year it earned 45,000 dollars in net income and paid 15,000 dollars in dividends to its shareholders. Here is how to find the new balance.

1. Find beginning retained earnings. This is last year ending balance, taken from the equity section of the prior balance sheet: 120,000 dollars.
2. Find net income for the period. From the bottom line of the income statement, the profit is 45,000 dollars.
3. Find dividends paid. The financing section of the cash flow statement shows the company distributed 15,000 dollars to shareholders.
4. Write out the formula. 120,000 plus 45,000 minus 15,000.
5. Add net income to the beginning balance. 120,000 plus 45,000 equals 165,000.
6. Subtract dividends. 165,000 minus 15,000 equals 150,000 dollars in ending retained earnings.

That ending balance of 150,000 dollars becomes the beginning retained earnings for next year, and the cycle repeats. The running nature of this figure is why a healthy, growing company tends to show retained earnings climbing year after year, while a business that pays out most of its profit stays roughly flat.

Retained earnings reference table

The table below shows how the same starting balance leads to very different outcomes depending on profit and dividend choices. Every row uses the same formula, so you can trace exactly how each input moves the ending balance.

The fourth row is worth a second look. A net loss is entered as a negative number, so the formula still works: 120,000 plus negative 20,000 minus 0 equals 100,000. Persistent losses can even push retained earnings below zero, which is then called an accumulated deficit.

Retained earnings vs dividends: what is the difference?

Retained earnings and dividends are the two things a company can do with its profit, and they are direct opposites: retained earnings is the profit kept inside the business, while dividends are the profit paid out to shareholders. Every dollar of net income is split between these two destinations, which is why they sit on opposite sides of the formula.

A young company that reinvests everything usually pays no dividends and shows fast growing retained earnings. A mature company with fewer growth opportunities may pay steady dividends and keep its retained earnings roughly flat. Neither is automatically better; the right mix depends on how productively the business can reinvest its profit.

Where each number comes from

Each input lives in a predictable place in the financial statements, which makes the calculation easy once you know where to look.

Beginning retained earnings

Look at the equity section of last period balance sheet, or the bottom line of the previous statement of retained earnings. This number must match exactly, because any difference will carry forward and distort every future period.

Net income

Net income is the final line of the income statement: revenue minus all expenses, interest, and taxes. Because profit drives retained earnings, the same habits that improve margins help here. Our guide on how to calculate profit margin explains how to read profitability, and the percentage calculator is handy when you want to express year over year growth as a percent.

Dividends paid

Dividends are recorded in the financing section of the cash flow statement or in the equity rollforward. Include both cash dividends and the value of any stock dividends declared during the period. If the board paid nothing out, this is zero.

Practical tips for getting it right

• Reconcile against the balance sheet. The ending retained earnings you calculate should equal the retained earnings line shown in equity on the balance sheet. If the two disagree, one of your three inputs is wrong.
• Keep a rollforward schedule. A simple table with a row per period, showing beginning balance, net income, dividends, and ending balance, makes errors obvious and gives auditors a clean trail.
• Watch for prior period adjustments. Corrections to earlier statements are recorded against beginning retained earnings, not the current period, so a restated opening balance is normal after an error is fixed.
• Do not let cash needs distort the number. Because retained earnings is not cash, a company can keep growing the balance while cash stays tight. Track the two separately.
• Mind the tax angle on hoarding profit. The U.S. Internal Revenue Service can levy an accumulated earnings tax on corporations that retain profit beyond the reasonable needs of the business. Most companies stay comfortably under the accumulated earnings credit, but it is a real guardrail worth knowing about.

Common mistakes to avoid

• Confusing retained earnings with cash. Retained earnings is an accounting balance in equity, not a pile of money. The cash may already be tied up in inventory, equipment, or paying down debt.
• Adding dividends instead of subtracting them. Dividends leave the business, so they always reduce retained earnings. Reversing the sign is the single most common error.
• Forgetting that a net loss is negative. A loss must be entered as a negative net income, which lowers the balance. Do not subtract it twice.
• Using the wrong beginning balance. The beginning figure must equal last period ending figure to the cent. A typo here compounds forever.
• Mixing periods. Net income and dividends must both come from the same accounting period as the one you are reporting.

Why retained earnings matter

Retained earnings sit in the shareholders equity section of the balance sheet, and they represent the cumulative profit a company has reinvested since day one. Investors and lenders read the trend closely. Rising retained earnings often signal a company funding its own expansion, paying down debt, or building reserves for lean times. A flat or falling balance can mean heavy dividend payouts, repeated losses, or a deliberate strategy to return cash to owners.

The figure also connects to long term growth. Profits kept in the business can be reinvested and compound over time, much like interest in a savings account. If you want to see how reinvested money snowballs, the ideas in compound interest explained translate directly: small amounts retained and reinvested every year can grow into a substantial base. You can model that growth with our compound interest calculator.

Good to know

• Retained earnings can be negative. A negative balance is called an accumulated deficit and is common for startups still investing heavily before turning a profit.
• The figure is cumulative, not annual. It reflects every period since the company began, not just the current year.
• Stock buybacks and prior period adjustments can also affect equity, though the core formula focuses on net income and dividends.
• Retained earnings is reported on both the balance sheet and its own statement, and the two must always agree.

Once you are comfortable with the formula, calculating retained earnings becomes a quick, repeatable check you can run every period. Pull last year ending balance, add this year profit, subtract dividends, and you have a clear measure of how much value the business is keeping for the future.