Retained Earnings
Accumulated profit kept in the business.
Formula
Variables
Example
Reinvested profit
How it works
Retained earnings track how much of a company’s accumulated profit has been kept in the business instead of paid out to owners. The balance starts with the previous retained earnings amount, then rises when the company earns net income and falls when it distributes dividends, because dividends are a transfer of profits out of the business. This is why the formula updates the balance by adding net income and subtracting dividends.
When to use it
Use this formula when you need to find the ending retained earnings for a period, such as at the end of a quarter or year. It is common in financial statement preparation, equity analysis, and checking how profit decisions affect the owners’ equity section of the balance sheet.
Worked example, step by step
Beginning retained earnings (RE_0) = 48,000 Net income (NI) = 22,500 Dividends = 7,500 RE = RE_0 + NI - Dividends RE = 48,000 + 22,500 - 7,500 RE = 63,000 Ending retained earnings = 63,000
Common mistakes to avoid
- adding dividends instead of subtracting them
- using gross profit or revenue instead of net income
- forgetting that RE_0 is the beginning balance from the previous period
Did You Know?
Retained earnings are profits a company keeps to reinvest rather than pay out as dividends.
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BasicThe foundation of double-entry bookkeeping: everything a business owns is financed either by debt or by owners’ capital.
Cost of Goods Sold
BasicThe direct cost of the inventory actually sold during a period.
Gross Profit
BasicWhat remains from sales after subtracting the direct cost of the goods sold, before operating expenses.
Net Income
BasicThe “bottom line” — total earnings after all expenses, interest and taxes are deducted from revenue.
Retained Earnings
BasicCumulative profit kept in the business rather than paid out to shareholders.
Current Ratio
IntermediateA liquidity measure of whether a firm can cover its short-term obligations with short-term assets.