How Retained Earnings Are Calculated (Formula and Worked Example)

Retained earnings are calculated period by period. You start with the retained earnings balance at the beginning of the period, add the period's net income (or subtract a net loss), and subtract the dividends the company declared during the period. The result is the ending balance, which becomes the next period's starting point.

Ending retained earnings = Beginning retained earnings + Net income (− Net loss) − Dividends declared

Retained earnings is a running total, not a one-year figure. A common mistake is to calculate "net income minus dividends" and call that retained earnings. That number is only this period's change; you still have to add it to the opening balance.

The retained earnings formula, input by input

The SEC's Beginners' Guide to Financial Statements describes shareholders' equity as "the amount owners invested in the company's stock plus or minus the company's earnings or losses since inception," and notes that "sometimes companies distribute earnings, instead of retaining them. These distributions are called dividends." Retained earnings is the "earnings or losses since inception" part, minus those distributions. The OpenStax Principles of Financial Accounting textbook (Rice University) defines it as "the cumulative net income minus any cumulative losses less dividends declared."

Each input comes from a specific place:

• Beginning retained earnings: from last period's balance sheet (the closing balance). This is the starting point.
• Net income or net loss: from this period's income statement (the bottom line, after tax). A profit adds; a loss subtracts.
• Dividends declared: from board resolutions and the dividend accounts in the ledger. These subtract.
• Prior-period adjustments, if any: from the notes to the financial statements. These adjust the beginning balance.

Use net income after tax, not gross profit, operating income or pre-tax income. If you only have revenue and expense figures, work down to net income first (our guide to net income walks through that), then apply the formula.

Dividends declared, not dividends paid

Retained earnings drops when a dividend is declared, not when the cash leaves the bank. OpenStax explains that "cash and property dividends become liabilities on the declaration date": the entry is a decrease (debit) to Retained Earnings and an increase (credit) to Cash Dividends Payable. When the dividend is later paid, the entry reduces Dividends Payable and Cash. Retained earnings is not touched a second time.

So if a dividend is declared in December and paid in January, it reduces retained earnings in the December year and appears as a liability (dividends payable) on that year-end balance sheet.

Worked example: three years with a profit, a loss and a dividend

Harbor Lane Supply Co. is a fictional company. All figures are sample numbers for illustration. Its fiscal year matches the calendar year.

• 2023: it starts the year with $40,000 of retained earnings. Net income is $25,000. The board declares and pays a $10,000 cash dividend.
• 2024: a difficult year. The company reports a net loss of $18,000 and declares no dividend.
• 2025: it returns to profit with net income of $12,000. On December 15, 2025, the board declares a $5,000 dividend, payable on January 20, 2026.

Year by year, each ending balance becomes the next year's beginning balance:

• 2023: beginning retained earnings $40,000 + net income $25,000 − dividends declared $10,000 = ending retained earnings $55,000.
• 2024: beginning retained earnings $55,000 − net loss $18,000 − dividends declared $0 = ending retained earnings $37,000. The loss reduces retained earnings just as a profit increases it.
• 2025: beginning retained earnings $37,000 + net income $12,000 − dividends declared $5,000 = ending retained earnings $44,000. The $5,000 dividend counts in 2025 because that's when it was declared. The cash goes out in 2026, so the December 31, 2025 balance sheet also shows a $5,000 dividends payable liability.

To check the three years together, take the opening balance, add total net results and subtract total dividends declared:

$40,000 + ($25,000 − $18,000 + $12,000) − ($10,000 + $0 + $5,000) = $40,000 + $19,000 − $15,000 = $44,000

That matches the 2025 closing balance, so the schedule reconciles.

The same formula also works backwards. If you have two balance sheets and the income statement, and there were no other entries to retained earnings, you can find dividends declared: beginning balance + net income − ending balance. For 2025, that's $37,000 + $12,000 − $44,000 = $5,000.

Where retained earnings appear in the financial statements

On the balance sheet, retained earnings is a line in the equity section (called "shareholders' equity" or "stockholders' equity" for corporations), next to contributed capital such as common stock. It is a cumulative balance at a point in time. See our guides to the balance sheet and to equity in business for the rest of that section.

In a statement that explains the movement, the opening and closing balances are reconciled the way the worked example above does it:

• Statement of retained earnings. It starts with the beginning balance, adds net income, subtracts dividends declared and ends with the ending balance. OpenStax notes that it "is a subsection of the statement of stockholders' equity."
• Statement of stockholders' (shareholders') equity. The SEC guide calls it the financial statement that "shows changes in the interests of the company's shareholders over time." In the US, companies that file with the SEC must reconcile "the beginning balance to the ending balance" for each equity caption, and for dividends must "state the amount per share and in the aggregate for each class of shares" (Regulation S-X Rule 3-04, 17 CFR 210.3-04).
• Statement of changes in equity (IFRS). Under IFRS Accounting Standards, IAS 1 lists "a statement of changes in equity for the period" as part of a complete set of financial statements. IFRS 18 replaces IAS 1 for annual periods beginning on or after 1 January 2027. If you report under IFRS, check which standard applies to your reporting period.

Because the calculation needs net income, the retained earnings figure is worked out after the income statement. Its ending balance then goes into the balance sheet.

What changes retained earnings, and what doesn't

Net income or net loss. Revenue, cost of goods sold, wages, depreciation, interest and tax all affect retained earnings, but only through net income. Don't add or subtract them separately, or you'll count them twice.

Cash and property dividends reduce retained earnings when they are declared, as described above.

Stock dividends also reduce retained earnings. The amount moves into contributed capital rather than leaving the company. According to OpenStax, "both small and large stock dividends cause an increase in common stock and a decrease to retained earnings," while "total stockholders' equity remains the same." OpenStax adds that small stock dividends are recorded at market value and large ones at par or stated value.

Prior-period adjustments correct errors in earlier financial statements. OpenStax explains that they are shown on the statement of retained earnings "as an adjustment to the beginning balance of retained earnings" and have "no effect on current period net income." For companies reporting under IFRS Accounting Standards, IAS 8 (since retitled Basis of Preparation of Financial Statements) requires material prior-period errors to be corrected retrospectively, by restating the comparative amounts for the periods affected, unless it is impracticable to determine the effects of the error. It also requires changes in accounting policy to be applied retrospectively, unless that is impracticable or another standard sets specific transition rules.

What doesn't change retained earnings: selling new shares (that increases contributed capital, not earned capital), borrowing or repaying loans, or buying equipment. These change assets, liabilities or contributed capital. They aren't profits or distributions.

Retained earnings are not cash

Retained earnings sits on the equity side of the balance sheet. It shows how much of the company's net assets came from profits kept in the business instead of being paid out. It is not money in the bank. Profits kept in earlier years may have gone into inventory, equipment, customer receivables or loan repayments. A company can report large retained earnings and still be short of cash, or have plenty of cash and an accumulated deficit (for example, a startup funded by investors).

To see how much cash the business actually has and where it went, look at the cash line on the balance sheet and the cash flow statement.

When retained earnings are negative: accumulated deficit

If total losses and dividends since the company started are larger than total profits, the balance turns negative. OpenStax calls this "a deficit in retained earnings," and its comparison table gives "accumulated losses" as the IFRS term. On a balance sheet the line may also be labelled "accumulated deficit." The deficit still sits in equity, as a negative number that reduces total equity.

Using the example above: if Harbor Lane's 2024 loss had been $60,000 instead of $18,000, the 2024 calculation would be $55,000 − $60,000 − $0 = −$5,000. That would be an accumulated deficit of $5,000. The 2025 profit of $12,000 would bring it back to $7,000, and the $5,000 dividend would then leave $2,000. Whether a company is legally allowed to pay a dividend in that position depends on the corporate law of its jurisdiction, not on this formula.

Common calculation mistakes

• Leaving out the beginning balance. Net income minus dividends is the change for the period, not the balance.
• Subtracting dividends when they are paid instead of when they are declared. The timing matters at year-end.
• Using the wrong profit figure. Use net income after tax, not gross profit or operating profit.
• Adding expenses or revenue a second time. They are already in net income.
• Not carrying the closing balance forward. Each period's ending balance must equal the next period's beginning balance (after any prior-period adjustment).

Related guides

• What Is Equity in Business?
• What Is Net Income?
• What Is a Balance Sheet?
• What Causes Dividends Per Share to Decrease?
• 6 Steps to Close Your Accounting Year

Frequently Asked Questions

What is the formula for retained earnings?

Ending retained earnings equal beginning retained earnings plus net income (or minus a net loss) minus dividends declared during the period. If an error in an earlier period's statements is corrected through a prior-period adjustment, the beginning balance is adjusted first.

Are retained earnings the same as net income?

No. Net income is the profit for one period and comes from the income statement. Retained earnings is the cumulative total of all net income and losses since the company started, minus all dividends declared, and it sits in the equity section of the balance sheet.

Do dividends reduce retained earnings when declared or when paid?

When declared. On the declaration date the company reduces retained earnings and records a dividends payable liability. When it pays the dividend later, it reduces that liability and cash, and retained earnings doesn't change again.

Can retained earnings be negative?

Yes. When cumulative losses and dividends exceed cumulative profits, the balance is negative. It stays within equity as a negative amount, labelled for example "deficit," "accumulated deficit" or "accumulated losses." This is common for young companies that have not yet turned a profit.

Do retained earnings reset at the end of each year?

No. Revenue and expense accounts close at year-end and their net result is transferred into retained earnings. Retained earnings itself carries forward, so this year's closing balance is next year's opening balance.

Is a high retained earnings balance the same as having cash available?

No. Retained earnings is part of equity, not an asset. Profits kept in earlier years may already have been spent on inventory, equipment or debt repayment. Check the cash balance and the cash flow statement to see what is actually available.