Excite

How to calculate retained earnings

First of all you’ll want to know what retained earnings are. They you’ll want to work out how they affect you and then you’ll need to know how to calculate retained earnings. We’ll bring you through all of this to make things really simple.
    wikimedia commons

Retained earnings

Retained earnings, which is also known as the "retention ratio" or "retained surplus", is the percentage of net earnings which aren’t paid as a dividend. They’re retained by the company and then reinvested into the core business which basically helps push the firm on for every shareholder and stakeholder in the endeavour. Sometimes they’re used to pay off debts which can hold off unwanted legal complications or perhaps keep a supplier happy.

How are retained earnings recorded?

You’ll need to check the balance sheet. This is where you’ll find retained earnings as they’re recorded under the shareholders' equity section.

Formula for calculating retained earnings

The formula for calculating retained earnings is this: You add net income to the retained earnings you already have and then subtract the dividends you’ve already paid out to your many shareholders.

Equation

The equation should look something like this –

Retained earnings (RE) = Beginning RE + Net Income – Dividends

Further explanation

If you’d like greater depth on this, read on. Most firms retain the money to invest in areas in which they’ll be able to make even greater returns. Perhaps they’ll spend the money in research and development or through the purchase of newer machinery that will cut production times or make the process of manufacturing their product more cost effective.

Dealing with a net loss

If there’s a net loss that’s greater than the beginning retained earnings, you’ll end up with a negative figure. This creates a deficit.

United Kingdom - Excite Network Copyright ©1995 - 2017