# How Retained Earnings Are Calculated?

Retained earnings are calculated by subtracting expenses from income (thus obtaining net profit). Subsequently, the dividends actually paid to the shareholders are subtracted. The remaining balance will be retained earnings.

The formula for retained earnings is as follows:

Retained Income (RE) = Initial Income + Net Income – Dividends, also known as the “retention rate” or “retained surplus”.

## How is the calculation done?

The net profit at the end of the reporting period is equal to the net profit’s difference at the beginning of the reporting year and the net profit from dividends paid to shareholders in the current year from the net profit from previous years.

If you don’t have a net profit you can do the calculations according to the scheme. Also, each company must document its financial history:

1. First, the company must find a gross profit. This is necessarily reflected in the income statement and this can be determined by subtracting the value of the goods sold from the proceeds of such sales.
2. Now calculate the operating income – the one that remains after covering sales costs and current expenses (for example, salary). Operating costs should be deducted only from gross profit, in addition to the cost of goods sold.
3. To calculate the pre-tax net profit, all expenses related to interest payments, depreciation and amortization must be deducted.
4. After deducting taxes, first, apply the company’s tax rate to the net profit before tax (just multiply it), and then the resulting amount will be deducted from that profit.
5. It remains to deduct the dividends. Net income has already been settled from company costs; you deduct dividends paid to shareholders.
6. You can calculate your current account balance that reflects retained earnings. Do not forget that this is a funded account, and all changes in retained earnings are reflected in it from the time the company was founded to the present. Thus, the amount of the current period is added to the amount that was at the end of the previous reporting year.

These calculations are necessary when calculating the exact amount of dividends or when redistributing company income for their own needs. Therefore, awareness of how it is executed is essential not only for the accountant but also for the entrepreneur.

Joint-stock companies, other companies, and other organizations amount not provided for by law from their own sources.

The uncovered loss is determined, taking into account payments to the budget and other expenses reimbursable from the invoice. It shows the amount of uncovered loss as at the reporting date, regardless of when it occurred.

### The loss may result from:

• surplus of costs over income from financial and economic activities as well as from non-operational operations;
• detection of significant errors from previous years in the reporting year;
• Any change in tax, the value of products sold, etc.

### Reasons for the uncovered loss:

• receipt of an actual negative result on the company’s operations due to high costs over revenues;
• changes in accounting policies that affected the company’s financial position;
• mistakes found in the current year, made in previous years, which had an impact on the financial result.

## How Do You Prepare a Retained Earnings Statement?

In an accounting cycle, the retained earning’s statement is the second financial statement that should be prepared during the accounting period. Retained earnings are the income that stays in the company after the payment of dividends. Then this income is reinvested in the company for various projects. This is an example of a statement.

### 01-prepare to retain the title of the income statement

A retained income statement should have a three-line heading. The first line is the name of the company. The second line is very simple, that is, “retain the income statement.” The third line is “as of XXXXX years.” For the term “year”, you can enter any accounting period.

### 02-State the balance of retained earnings for the previous year

The retained earnings table’s first item should be the balance of retained earnings for the previous year. This comes from the balance sheet of the previous year. Suppose we assume that the company’s retained earnings balance is \$30,000. The first line of the retained earnings report is as follows:

• Retained profit, \$30,000 on December 31, 2015

### 03-Increase net income from the income statement

The retained earning’s statement should be the second financial statement prepared. The income statement is the first. Suppose this hypothetical company’s net income is \$20,000. This is the first item added to the retained earning’s statement. Our retained earnings report is now as follows:

• Retained earnings: \$30,000 on December 31, 2015,
• Plus: 2016 net income +20,000
• Total \$50,000

If the company has a net loss on the income statement, the net loss is subtracted from the existing retained earnings.

### 04-Minus the dividend paid by your company to investors

If a company pays dividends it subtracts the amount of dividends the company paid out of net income. If not, then it subtracts \$0. For example, a company’s dividend policy is to pay 40% of net income to investors. In this example, \$4,000 will be paid as a dividend and deducted from the current total.

• Retained profit, \$30,000 on December 31, 2015,
• Plus: 2016 net income +10,000
• Total \$ 40,000
• Less: Dividend (4,000)

Dividends are considered as debits in retained earnings accounts, whether they have been paid. Suppose, if a company declares a dividend of \$7.00 per share for 20,000 shares, then even if the dividend has not been paid, the company’s retained earnings will be deducted by \$140,000.

### 05-Prepare the final total of retained earnings

If you pay dividends, subtract the dividend and deduct the retained earning’s statement. This is the total amount of retained earnings that you post to the new 2017 balance sheet’s undistributed income account.

• Retained earnings, \$30,000 on December 31, 2012,
• Plus: 2013 net income was \$20,000
• Total: \$50,000
• Less: Dividend paid \$16,000
• December 31, 2013, retained earnings of \$36,000

This completes the retained earning’s statement.

## How Many Methods Are There To Calculate Retained Earnings?

You can use the least two ways to calculate retained earnings.

### Practical way

This practical way can be done if you successfully obtain the company’s financial statements, both profit, and loss, in a detailed ‘version.’ The detailed financial statements will certainly include the company’s net profit and the number of dividends distributed to investors or shareholders if you get the complete financial statements for several periods until the last period of the calculation so that the cumulative retained earnings balance can also be calculated.

From a complete financial statement source, you can easily calculate retained earnings by subtracting net income from dividends paid. The simple formulation is as follows:

Retained earnings = net income – dividends paid

Cumulative retained earnings = retained earnings last period + current period retained earnings

For example, company X had a cumulative retained earnings balance of \$200 million at the end of the 2018 period. During the 2019 period, company X’s business activities generated a net profit of \$77 million, and \$37 million was paid to investors as dividends. So, the retained earnings balance of company X can be calculated:

Retained earnings = \$77 million – \$\$37million = \$40 million

Cumulative retained earnings = \$200 million + \$40 million = \$240 million

### Manual way

To calculate retained earnings through net income will be very easy if you obtain detailed information and company financial data. Unfortunately, not all companies are willing to provide financial data in the balance sheet and the complete income statement, so the data about the amount of net income and dividends paid to investors is unknown. So, how do you calculate retained earnings from the company? The only way is to count manually.

The manual calculation does require quite long stages and complete financial information and data, such as sales figures, cost of goods sold, to company operating costs. The process of calculating net income can be done from various data and information so that the amount of retained earnings owned by the company can be known accurately. The stages of calculating retained earnings manually are as follows:

#### 1. Starting with calculating gross profit

If you are unable to get information and data about the company’s net profit, you must first calculate the gross profit. Gross profit can be determined by calculating the difference between sales figures and the cost of goods sold.

Gross profit = sales figure – the cost of goods sold

For example, the number of sales of company Z in 2018 reached \$57 million. In the same period, the company also had to pay costs to reach the sales figure of \$15 million. From this information, the company’s gross profit can be calculated:

Gross profit = \$57 million –  \$15 million = \$42 million

#### 2. Calculating operating profit

Costs incurred by the company in carrying out its business activities are not limited to cost of goods sold, but also operational costs such as office administrative costs, factory overhead, salaries, and so forth. Well, these operational costs will certainly reduce gross profit in addition to the cost of goods sold. Gross profit minus operating costs will become profit after operations.

For example, a gross profit of \$42 million was obtained. If company Y spent funds to pay operational costs of \$11 million in the same period, the profit after the operation could be calculated as follows.

Operating profit = \$42 million – \$11 million = \$31 million

#### 3. Calculate net income before tax

After obtaining profits after operations, then the net profit value before tax must be known. To obtain the profit’s value, operating profit must be reduced by interest, depreciation or depreciation, and amortization. What are depreciation and amortization? Both are depreciation of fixed and tangible assets. Depreciation represents a depreciation of fixed assets such as office equipment and factories and vehicles, while amortization represents a depreciation of fixed assets in the form of marketable securities.

Continuing from the previous example, company Z paid an interest fee of \$. 5 million, depreciation of \$2.5 million, and amortization of RP. 7.3 million. Therefore, net income before tax can be determined by calculating as follows:

Net profit before tax =\$31 million – (\$5 million + \$2.5 million + \$7.3 million) = \$16.2 million

#### 4. Calculate net profit after tax

Taxes are the final cost component in the stage of calculating the net profit earned by a company. Net profit after tax is obtained by subtracting net income before tax at the tax rate.

To give a clearer picture, the tax rate levied on company B is 25%. From the tax rate, then the tax and net profit after tax can be calculated as follows.

Tax = 25% x \$16.2 million = \$4.05 million

Net profit after tax = \$16.2 million – \$4.05 million = \$12.15 million

#### 5. Calculate retained earnings

After knowing the net profit after tax, the calculation of retained earnings until the final stage. At this final stage, make sure you have information about the number of dividends distributed to the company’s investors. With this dividend information, you can calculate the company’s retained earnings.

In the example of the case discussed, it is assumed that company Z pays dividends to its shareholders of \$5 million. Thus, the amount of retained earnings owned by this company can be calculated as follows.

Retained earnings = \$12.15 million – \$5 million = \$7.15 million

There are no fixed rules for calculating the amount of retained earnings. This depends on the policies of each company, given the amount of net profit obtained by each company is not the same. Thus, determining the amount of retained earnings becomes the authority of the company’s board of commissioners.

## Where the retained earnings are recorded?

The retained earnings constitute a permanent account that appears on the balance sheet of a business under the title of “Net Worth.” The balance of the account represents the company’s accumulated earnings since its incorporation that was not shared with the stockholders in the form of dividends. If the retained earnings account has a contrary balance, it is called “accumulated deficit”.

Knowing the accumulated retained earnings of a company since its incorporation allows you to calculate the balance of retained earnings after the next reporting period. For example, if a company has \$350,000 in retained earnings and generates \$180,000 in retained earnings during the current reporting period, then the new cumulative value for retained earnings is \$530,000. If a company makes \$340,000 in retained earnings in the next year, you will get a total of \$870,000. In other words, since the company’s constitution, it has generated enough for it to “keep” \$ 870,000 after wages, operating expenses, dividends paid to shareholders, etc.

## What factors affect the amount of retained earnings?

Retained earnings may vary from one reporting period to another, but this is not always the result of changes in the company’s income. Here are the factors that can affect retained earnings:

• Change in net profit
• Change in the amount of cash paid as a dividend to investors
• Change in the value of goods sold
• Change of tax
• Change of business strategy of the company

## Dividends and Retained Earnings

Dividends can be distributed in cash or in shares. Both forms of distribution reduce retained earnings.

As the company loses ownership of its cash and cash equivalents in the form of cash dividends, its assets in the balance sheet are reduced, which affects retained earnings. On the other hand, the payment of shares, even if the dividend in shares does not lead to cash flow, transfers part of the retained earnings to ordinary shares.

### How to calculate them?

To calculate retained earnings, add the net profit (or deducting net losses) to the earned value in the previous period, and then subtracting dividends paid to shareholders. Mathematically, the formula would be:

Profit retained = Income retained at the beginning of the period + Net gain (or loss) – Cash dividend – Dividend on shares. The amount is calculated at the end of each accounting period (quarterly / annually). As the formula suggests, the retained earnings are dependent on corresponding figures in the previous period.

The resulting figure can be positive or negative, depending on the company’s net profit or loss.

Alternatively, the company that pays a large dividend, which exceeds the other figures, can also lead to negative earnings. Any item that affects the net gain (or loss) will affect retained earnings. These items include sales revenue, cost of goods sold, depreciation, and operating expenses.

Examples:

One way to assess a company’s success by using retained earnings is through a key indicator called “retained earnings at market value”.

It is calculated for a period, considering the change in the price of the shares in relation to the profit retained by the company. For example, over five years, between September 2015 and September 2019, the price of Sony shares increased from \$ 85.50 to \$ 175.18 per share.

In the same five-year period, the total value per share was \$ 40.86, while the company’s total dividend was \$ 20 per share.

These figures are available in the “key indicators” in the company’s reports. The difference between earnings per share and total dividends gives a net profit retained by the company: \$ 40.86 – \$ 20 = \$ 20.86. That is, during these five years, the company had an income of \$ 20.86 per share.

During the same period, their shares’ price increased to \$ 175.18 – \$ 85.50 = \$ 89.68 per share.

## How to calculate retained earnings on a balance sheet?

To calculate the retained earnings on a balance sheet. The formula is simple

Retained Earnings = Beginning Period Retained Earnings + Net Income/Loss – Cash Dividends – Stock Dividends.

.Suppose you prepare the balance sheet for the third quarter. Take the second quarter retained earnings, add the company’s third-quarter net earnings, subtract the dividends, and you’re there.

For example, suppose a company started the quarter with retained earnings of \$ 500,000. Its income statement indicates that net income for the third quarter is \$ 65,000. It distributes dividends of \$ 45,000 to shareholders. This leaves you with a total of \$ 520,000 in retained earnings, which you report on the balance sheet. This becomes the basic retained earnings for the fourth quarter.

Third-quarter retained earnings may become negative. If you declared a dividend of \$200,000, your retained earnings would be – \$45,000. If you experience significant losses, you may have to draw on retained earnings to pay them off.

Retained earnings are calculated by subtracting expenses from income (thus obtaining net profit). Subsequently, the dividends actually paid to the shareholders are subtracted. The remaining balance will be retained earnings.

The formula for retained earnings is as follows:

Retained Income (RE) = Initial Income + Net Income – Dividends, also known as the “retention rate” or “retained surplus”.

## How is the calculation done?

The net profit at the end of the reporting period is equal to the net profit’s difference at the beginning of the reporting year and the net profit from dividends paid to shareholders in the current year from the net profit from previous years.

If you don’t have a net profit you can do the calculations according to the scheme. Also, each company must document its financial history:

1. First, the company must find a gross profit. This is necessarily reflected in the income statement and this can be determined by subtracting the value of the goods sold from the proceeds of such sales.
2. Now calculate the operating income – the one that remains after covering sales costs and current expenses (for example, salary). Operating costs should be deducted only from gross profit, in addition to the cost of goods sold.
3. To calculate the pre-tax net profit, all expenses related to interest payments, depreciation and amortization must be deducted.
4. After deducting taxes, first, apply the company’s tax rate to the net profit before tax (just multiply it), and then the resulting amount will be deducted from that profit.
5. It remains to deduct the dividends. Net income has already been settled from company costs; you deduct dividends paid to shareholders.
6. You can calculate your current account balance that reflects retained earnings. Do not forget that this is a funded account, and all changes in retained earnings are reflected in it from the time the company was founded to the present. Thus, the amount of the current period is added to the amount that was at the end of the previous reporting year.

These calculations are necessary when calculating the exact amount of dividends or when redistributing company income for their own needs. Therefore, awareness of how it is executed is essential not only for the accountant but also for the entrepreneur.

Joint-stock companies, other companies, and other organizations amount not provided for by law from their own sources.

The uncovered loss is determined, taking into account payments to the budget and other expenses reimbursable from the invoice. It shows the amount of uncovered loss as at the reporting date, regardless of when it occurred.

### The loss may result from:

• surplus of costs over income from financial and economic activities as well as from non-operational operations;
• detection of significant errors from previous years in the reporting year;
• Any change in tax, the value of products sold, etc.

### Reasons for the uncovered loss:

• receipt of an actual negative result on the company’s operations due to high costs over revenues;
• changes in accounting policies that affected the company’s financial position;
• mistakes found in the current year, made in previous years, which had an impact on the financial result.

## How Do You Prepare a Retained Earnings Statement?

In an accounting cycle, the retained earning’s statement is the second financial statement that should be prepared during the accounting period. Retained earnings are the income that stays in the company after the payment of dividends. Then this income is reinvested in the company for various projects. This is an example of a statement.

### 01-Prepare to retain the title of the income statement

A retained income statement should have a three-line heading. The first line is the name of the company. The second line is very simple, that is, “retain the income statement.” The third line is “as of XXXXX years.” For the term “year”, you can enter any accounting period.

### 02-State the balance of retained earnings for the previous year

The retained earnings table’s first item should be the balance of retained earnings for the previous year. This comes from the balance sheet of the previous year. Suppose we assume that the company’s retained earnings balance is \$30,000. The first line of the retained earnings report is as follows:

• Retained profit, \$30,000 on December 31, 2015

### 03-Increase net income from the income statement

The retained earning’s statement should be the second financial statement prepared. The income statement is the first. Suppose this hypothetical company’s net income is \$20,000. This is the first item added to the retained earning’s statement. Our retained earnings report is now as follows:

• Retained earnings: \$30,000 on December 31, 2015,
• Plus: 2016 net income +20,000
• Total \$50,000

If the company has a net loss on the income statement, the net loss is subtracted from the existing retained earnings.

### 04-Minus the dividend paid by your company to investors

If a company pays dividends it subtracts the amount of dividends the company paid out of net income. If not, then it subtracts \$0. For example, a company’s dividend policy is to pay 40% of net income to investors. In this example, \$4,000 will be paid as a dividend and deducted from the current total.

• Retained profit, \$30,000 on December 31, 2015,
• Plus: 2016 net income +10,000
• Total \$ 40,000
• Less: Dividend (4,000)

Dividends are considered as debits in retained earnings accounts, whether they have been paid. Suppose, if a company declares a dividend of \$7.00 per share for 20,000 shares, then even if the dividend has not been paid, the company’s retained earnings will be deducted by \$140,000.

### 05-Prepare the final total of retained earnings

If you pay dividends, subtract the dividend and deduct the retained earning’s statement. This is the total amount of retained earnings that you post to the new 2017 balance sheet’s undistributed income account.

• Retained earnings, \$30,000 on December 31, 2012,
• Plus: 2013 net income was \$20,000
• Total: \$50,000
• Less: Dividend paid \$16,000
• December 31, 2013, retained earnings of \$36,000

This completes the retained earning’s statement.

## How Many Methods Are There To Calculate Retained Earnings?

You can use the least two ways to calculate retained earnings.

### Practical way

This practical way can be done if you successfully obtain the company’s financial statements, both profit, and loss, in a detailed ‘version.’ The detailed financial statements will certainly include the company’s net profit and the number of dividends distributed to investors or shareholders if you get the complete financial statements for several periods until the last period of the calculation so that the cumulative retained earnings balance can also be calculated.

From a complete financial statement source, you can easily calculate retained earnings by subtracting net income from dividends paid. The simple formulation is as follows:

Retained earnings = net income – dividends paid

Cumulative retained earnings = retained earnings last period + current period retained earnings

For example, company X had a cumulative retained earnings balance of \$200 million at the end of the 2018 period. During the 2019 period, company X’s business activities generated a net profit of \$77 million, and \$37 million was paid to investors as dividends. So, the retained earnings balance of company X can be calculated:

Retained earnings = \$77 million – \$\$37million = \$40 million

Cumulative retained earnings = \$200 million + \$40 million = \$240 million

### Manual way

To calculate retained earnings through net income will be very easy if you obtain detailed information and company financial data. Unfortunately, not all companies are willing to provide financial data in the balance sheet and the complete income statement, so the data about the amount of net income and dividends paid to investors is unknown. So, how do you calculate retained earnings from the company? The only way is to count manually.

The manual calculation does require quite long stages and complete financial information and data, such as sales figures, cost of goods sold, to company operating costs. The process of calculating net income can be done from various data and information so that the amount of retained earnings owned by the company can be known accurately. The stages of calculating retained earnings manually are as follows:

#### 1. Starting with calculating gross profit

If you are unable to get information and data about the company’s net profit, you must first calculate the gross profit. Gross profit can be determined by calculating the difference between sales figures and the cost of goods sold.

Gross profit = sales figure – the cost of goods sold

For example, the number of sales of company Z in 2018 reached \$57 million. In the same period, the company also had to pay costs to reach the sales figure of \$15 million. From this information, the company’s gross profit can be calculated:

Gross profit = \$57 million –  \$15 million = \$42 million

#### 2. Calculating operating profit

Costs incurred by the company in carrying out its business activities are not limited to cost of goods sold, but also operational costs such as office administrative costs, factory overhead, salaries, and so forth. Well, these operational costs will certainly reduce gross profit in addition to the cost of goods sold. Gross profit minus operating costs will become profit after operations.

For example, a gross profit of \$42 million was obtained. If company Y spent funds to pay operational costs of \$11 million in the same period, the profit after the operation could be calculated as follows.

Operating profit = \$42 million – \$11 million = \$31 million

#### 3. Calculate net income before tax

After obtaining profits after operations, then the net profit value before tax must be known. To obtain the profit’s value, operating profit must be reduced by interest, depreciation or depreciation, and amortization. What are depreciation and amortization? Both are depreciation of fixed and tangible assets. Depreciation represents a depreciation of fixed assets such as office equipment and factories and vehicles, while amortization represents a depreciation of fixed assets in the form of marketable securities.

Continuing from the previous example, company Z paid an interest fee of \$. 5 million, depreciation of \$2.5 million, and amortization of RP. 7.3 million. Therefore, net income before tax can be determined by calculating as follows:

Net profit before tax =\$31 million – (\$5 million + \$2.5 million + \$7.3 million) = \$16.2 million

#### 4. Calculate net profit after tax

Taxes are the final cost component in the stage of calculating the net profit earned by a company. Net profit after tax is obtained by subtracting net income before tax at the tax rate.

To give a clearer picture, the tax rate levied on company B is 25%. From the tax rate, then the tax and net profit after tax can be calculated as follows.

Tax = 25% x \$16.2 million = \$4.05 million

Net profit after tax = \$16.2 million – \$4.05 million = \$12.15 million

#### 5. Calculate retained earnings

After knowing the net profit after tax, the calculation of retained earnings until the final stage. At this final stage, make sure you have information about the number of dividends distributed to the company’s investors. With this dividend information, you can calculate the company’s retained earnings.

In the example of the case discussed, it is assumed that company Z pays dividends to its shareholders of \$5 million. Thus, the amount of retained earnings owned by this company can be calculated as follows.

Retained earnings = \$12.15 million – \$5 million = \$7.15 million

There are no fixed rules for calculating the amount of retained earnings. This depends on the policies of each company, given the amount of net profit obtained by each company is not the same. Thus, determining the amount of retained earnings becomes the authority of the company’s board of commissioners.

## Where the retained earnings are recorded?

The retained earnings constitute a permanent account that appears on the balance sheet of a business under the title of “Net Worth.” The balance of the account represents the company’s accumulated earnings since its incorporation that was not shared with the stockholders in the form of dividends. If the retained earnings account has a contrary balance, it is called “accumulated deficit”.

Knowing the accumulated retained earnings of a company since its incorporation allows you to calculate the balance of retained earnings after the next reporting period. For example, if a company has \$350,000 in retained earnings and generates \$180,000 in retained earnings during the current reporting period, then the new cumulative value for retained earnings is \$530,000. If a company makes \$340,000 in retained earnings in the next year, you will get a total of \$870,000. In other words, since the company’s constitution, it has generated enough for it to “keep” \$ 870,000 after wages, operating expenses, dividends paid to shareholders, etc.

## What factors affect the amount of retained earnings?

Retained earnings may vary from one reporting period to another, but this is not always the result of changes in the company’s income. Here are the factors that can affect retained earnings:

• Change in net profit
• Change in the amount of cash paid as a dividend to investors
• Change in the value of goods sold
• Change of tax
• Change of business strategy of the company

## Dividends and Retained Earnings

Dividends can be distributed in cash or in shares. Both forms of distribution reduce retained earnings.

As the company loses ownership of its cash and cash equivalents in the form of cash dividends, its assets in the balance sheet are reduced, which affects retained earnings. On the other hand, the payment of shares, even if the dividend in shares does not lead to cash flow, transfers part of the retained earnings to ordinary shares.

### How to calculate them?

To calculate retained earnings, add the net profit (or deducting net losses) to the earned value in the previous period, and then subtracting dividends paid to shareholders. Mathematically, the formula would be:

Profit retained = Income retained at the beginning of the period + Net gain (or loss) – Cash dividend – Dividend on shares. The amount is calculated at the end of each accounting period (quarterly / annually). As the formula suggests, the retained earnings are dependent on corresponding figures in the previous period.

The resulting figure can be positive or negative, depending on the company’s net profit or loss.

Alternatively, the company that pays a large dividend, which exceeds the other figures, can also lead to negative earnings. Any item that affects the net gain (or loss) will affect retained earnings. These items include sales revenue, cost of goods sold, depreciation, and operating expenses.

Examples:

One way to assess a company’s success by using retained earnings is through a key indicator called “retained earnings at market value”.

It is calculated for a period, considering the change in the price of the shares in relation to the profit retained by the company. For example, over five years, between September 2015 and September 2019, the price of Sony shares increased from \$ 85.50 to \$ 175.18 per share.

In the same five-year period, the total value per share was \$ 40.86, while the company’s total dividend was \$ 20 per share.

These figures are available in the “key indicators” in the company’s reports. The difference between earnings per share and total dividends gives a net profit retained by the company: \$ 40.86 – \$ 20 = \$ 20.86. That is, during these five years, the company had an income of \$ 20.86 per share.

During the same period, their shares’ price increased to \$ 175.18 – \$ 85.50 = \$ 89.68 per share.

## How to calculate retained earnings on a balance sheet?

To calculate the retained earnings on a balance sheet. The formula is simple

Retained Earnings = Beginning Period Retained Earnings + Net Income/Loss – Cash Dividends – Stock Dividends.

.Suppose you prepare the balance sheet for the third quarter. Take the second quarter retained earnings, add the company’s third-quarter net earnings, subtract the dividends, and you’re there.

For example, suppose a company started the quarter with retained earnings of \$ 500,000. Its income statement indicates that net income for the third quarter is \$ 65,000. It distributes dividends of \$ 45,000 to shareholders. This leaves you with a total of \$ 520,000 in retained earnings, which you report on the balance sheet. This becomes the basic retained earnings for the fourth quarter.

Third-quarter retained earnings may become negative. If you declared a dividend of \$200,000, your retained earnings would be – \$45,000. If you experience significant losses, you may have to draw on retained earnings to pay them off.