Retained Earnings
Cumulative profit kept in the business rather than paid out to shareholders.
Formula
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Example
Start $100k + $70k NI − $20k dividends = $150k
How it works
Retained earnings is the portion of a company’s profits that stays in the business instead of being distributed to owners. The formula updates the balance by starting with last period’s retained earnings, adding current net income, and subtracting any dividends because dividends reduce the amount of profit left inside the company. This works because retained earnings is a running total of accumulated profits kept over time.
When to use it
Use this formula when preparing financial statements, checking how profits have accumulated over time, or analyzing how much profit a company has reinvested. It is especially useful in accounting problems that ask for the ending retained earnings balance after a period’s income and dividend payments.
Worked example, step by step
Beginning retained earnings = $45,000 Net income = $18,500 Dividends = $6,000 RE_1 = RE_0 + NI - Dividends RE_1 = 45,000 + 18,500 - 6,000 RE_1 = 57,500 Ending retained earnings = $57,500
Common mistakes to avoid
- Adding dividends instead of subtracting them
- Using revenue instead of net income
- Confusing retained earnings with cash on hand
Did You Know?
Retained earnings link the income statement to the balance sheet, carrying profit forward year after year.
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