How to Calculate Retained Earnings (Formula, Example, and Tips)
By ToolNimba Editorial Team June 20, 2026 6 min read
Quick answer
Retained earnings = beginning retained earnings + net income minus dividends paid. Start with the retained earnings balance from the end of the last period, add the profit (net income) earned this period, then subtract any dividends paid to shareholders. The result is the new retained earnings balance.
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.
The retained earnings formula
The formula is short and it appears on the statement of retained earnings, one of the core financial statements. Written out, it looks like this:
Ending retained earnings = Beginning retained earnings + Net income minus Dividends paid
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.
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.
- Find beginning retained earnings. This is last year ending balance: 120,000 dollars.
- Find net income for the period. From the income statement, the profit is 45,000 dollars.
- Find dividends paid. The company distributed 15,000 dollars to shareholders.
- Apply the formula. 120,000 plus 45,000 minus 15,000.
- Calculate the result. 120,000 plus 45,000 equals 165,000, then 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.
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.
How net income and dividends change ending retained earnings
| Beginning balance | Net income | Dividends paid | Ending balance |
|---|---|---|---|
| 120,000 | 45,000 | 15,000 | 150,000 |
| 120,000 | 45,000 | 0 | 165,000 |
| 120,000 | 0 | 10,000 | 110,000 |
| 120,000 | -20,000 (net loss) | 0 | 100,000 |
| 0 (new company) | 30,000 | 5,000 | 25,000 |
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.
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 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.
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.
Frequently asked questions
What is the formula for retained earnings?
Retained earnings equals beginning retained earnings plus net income minus dividends paid. Start with last period ending balance, add the current period profit, and subtract any dividends distributed to shareholders. The result becomes the new retained earnings balance carried into the next period.
Can retained earnings be negative?
Yes. When a company accumulates more losses and dividends than profits over time, retained earnings can fall below zero. This negative balance is called an accumulated deficit. It is common for young startups that invest heavily before becoming profitable, and is not unusual on its own.
Are retained earnings the same as cash?
No. Retained earnings is an equity balance that shows cumulative reinvested profit, not a cash account. The money may already be spent on inventory, equipment, or debt repayment. A company can have large retained earnings yet very little cash on hand at any moment.
Do dividends increase or decrease retained earnings?
Dividends decrease retained earnings. Because a dividend distributes profit out of the business to shareholders, it is subtracted in the formula. Both cash dividends and stock dividends reduce the balance. If a company pays no dividends, that part of the formula is simply zero.
Where do I find beginning retained earnings?
Beginning retained earnings is the ending retained earnings balance from the previous accounting period. You will find it in the equity section of the prior balance sheet or at the bottom of the previous statement of retained earnings. For a brand new company, it starts at zero.
How is net income used in retained earnings?
Net income, the profit from the income statement, is added to retained earnings each period. A profit raises the balance, while a net loss lowers it because it is entered as a negative number. Net income is the main driver that grows retained earnings over time.