Ending Retained Earnings Formula & Calculation
Ending Retained Earnings Formula & Examples Guide
The ending retained earnings formula is: Ending RE = Beginning RE + Net Income − Dividends Paid. Using this formula: $250,000 + $70,000 − $30,000 = $290,000. This ending balance is the final figure reported on the balance sheet and becomes next period's beginning retained earnings.
This guide covers the ending retained earnings formula in depth — what it means, how to calculate it step by step, how to work backwards when it's the unknown, common errors to avoid, and practice problems to test your understanding. Whether you're studying for an accounting exam or preparing financial statements, this post gives you everything you need.
Key Takeaways
- Ending RE = Beginning RE + Net Income − Dividends Paid
- Standard example: $250,000 + $70,000 − $30,000 = $290,000
- Ending RE appears on the balance sheet under stockholders' equity
- Ending RE becomes the next period's beginning RE — continuing the chain
- You can solve for any variable by rearranging the formula
- Net losses and large dividends can cause ending RE to be lower than beginning RE
The Ending Retained Earnings Formula
Ending RE = Beginning RE + Net Income − Dividends Paid
Alternative form (when there is a net loss):
Ending RE = Beginning RE − Net Loss − Dividends Paid
The formula is simple but conceptually powerful. It captures the entire flow of earnings within a company for a given period — how much it started with, how much it earned (or lost), and how much it distributed to shareholders.
For a full explanation of each input, see our guide: Retained Earnings Formula Explained (With Examples).
What Each Component of the Formula Means
| Component | Our Example | Source | Effect |
|---|---|---|---|
| Beginning RE | $250,000 | Prior year balance sheet | Starting point |
| Net Income | $70,000 | Current income statement | Increases RE |
| Dividends Paid | $30,000 | Dividend records | Decreases RE |
| Ending RE | $290,000 | Calculated result | Balance sheet figure |
Step-by-Step Calculation: The $290,000 Example
Here is the full calculation using our standard illustrative example, applied step by step:
Step 1: Identify Beginning Retained Earnings
(From last year's balance sheet, stockholders' equity section)
Step 2: Add Net Income
(Adding this year's net income from the income statement)
Step 3: Subtract Dividends Paid
(Deducting dividends distributed to shareholders during the year)
Final Result
| Calculation | Amount |
|---|---|
| Beginning Retained Earnings | $250,000 |
| Add: Net Income | +$70,000 |
| Less: Dividends Paid | −$30,000 |
| Ending Retained Earnings | $290,000 |
The net change this year was +$40,000 ($70,000 net income − $30,000 dividends). RE grew from $250,000 to $290,000.
Finding Ending RE When It's the Unknown Variable
On the CPA exam and in textbook problems, you are sometimes given three of the four formula variables and asked to find the fourth. The most common scenario is solving for ending RE — but exams also ask you to find beginning RE, net income, or dividends.
For ending RE, simply plug in the three knowns and calculate:
- You know: Beginning RE = $250,000, Net Income = $70,000, Dividends = $30,000
- Ending RE = $250,000 + $70,000 − $30,000 = $290,000
Rearranged Formulas: Solving for Other Variables
The retained earnings formula can be rearranged to solve for any missing variable:
| If You Need to Find… | Use This Rearrangement | Our Numbers |
|---|---|---|
| Ending RE | Beginning RE + Net Income − Dividends | $250,000 + $70,000 − $30,000 = $290,000 |
| Beginning RE | Ending RE − Net Income + Dividends | $290,000 − $70,000 + $30,000 = $250,000 |
| Net Income | Ending RE − Beginning RE + Dividends | $290,000 − $250,000 + $30,000 = $70,000 |
| Dividends Paid | Beginning RE + Net Income − Ending RE | $250,000 + $70,000 − $290,000 = $30,000 |
Multiple Scenario Examples
Scenario A: Net Loss Year
Ending RE = $250,000 − $25,000 − $15,000 = $210,000
Scenario B: No Dividends, High Profit
Ending RE = $250,000 + $70,000 = $320,000
Scenario C: First Year, Strong Profit
Ending RE = $0 + $70,000 − $30,000 = $40,000
Scenario D: Accumulated Deficit Risk
Ending RE = $50,000 − $80,000 − $10,000 = −$40,000 (Accumulated Deficit)
Where Does Ending Retained Earnings Go?
Once calculated, ending retained earnings serves two purposes:
1. Reports on the Balance Sheet
The ending retained earnings balance ($290,000 in our example) is reported in the stockholders' equity section of the balance sheet as of the period-end date.
2. Becomes Next Year's Beginning RE
The $290,000 ending balance rolls forward to become next year's beginning retained earnings. If next year the company earns $80,000 and pays $20,000 in dividends, the ending RE will be $290,000 + $80,000 − $20,000 = $350,000.
This is why retained earnings is described as a "permanent" or "real" account — its balance carries forward from period to period indefinitely, never being reset to zero like revenue or expense accounts.
For the formal presentation of how ending RE is derived: Statement of Retained Earnings: Format, Example & How to Prepare.
To understand the full debit/credit mechanics: Is Retained Earnings a Debit or Credit?
Common Errors When Calculating Ending Retained Earnings
| Error | How to Avoid It |
|---|---|
| Adding dividends instead of subtracting | Remember: dividends reduce what stays in the business — always subtract |
| Using revenue instead of net income | Only net income (after all expenses and taxes) flows into retained earnings |
| Using the wrong beginning RE | Beginning RE = prior year's ending RE — not the current year's opening trial balance unless restated |
| Forgetting stock dividends | Stock dividends reduce RE just like cash dividends — include them in the formula |
| Omitting prior period adjustments | Always adjust beginning RE for prior period error corrections before applying the formula |
| Including OCI in net income | Other comprehensive income bypasses retained earnings — it goes to AOCI, not RE |
Practice Problems: Ending Retained Earnings
Problem 1 — Solve for Ending RE
Beginning RE: $180,000 | Net Income: $55,000 | Dividends: $20,000
Problem 2 — Solve for Ending RE (Net Loss)
Beginning RE: $300,000 | Net Loss: $45,000 | Dividends: $25,000
Problem 3 — Standard Example
Beginning RE: $250,000 | Net Income: $70,000 | Dividends: $30,000
Problem 4 — Solve for Net Income
Beginning RE: $250,000 | Ending RE: $290,000 | Dividends: $30,000. Find net income.
Problem 5 — First Year of Operations
First year | Net Income: $85,000 | Dividends: $15,000
Practice Hundreds of Retained Earnings Problems — CPA Prep
Ending retained earnings calculations, formula rearrangements, and scenario analysis are all core CPA FAR exam skills. Our Surgent CPA Review Course gives you adaptive MCQ practice, video explanations for every retained earnings scenario, and full exam simulations so you can walk into FAR day fully prepared.
Frequently Asked Questions About Ending Retained Earnings
What is the ending retained earnings formula?
Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends Paid. For our standard example: $250,000 + $70,000 − $30,000 = $290,000.
Where does ending retained earnings appear?
Ending retained earnings appears on two documents: (1) as the final line of the Statement of Retained Earnings, and (2) as the "Retained Earnings" line item in the stockholders' equity section of the balance sheet — both as of the same period-end date.
What happens to ending retained earnings at the start of next year?
Ending retained earnings becomes the next period's beginning retained earnings. The balance carries forward automatically — retained earnings is a permanent account that is never closed to zero at year-end.
Can ending retained earnings be negative?
Yes. If cumulative losses plus dividends exceed cumulative profits, ending retained earnings will be negative — reported as an "accumulated deficit" on the balance sheet. This still appears in the stockholders' equity section but reduces total equity.
How do you find ending retained earnings from the balance sheet?
Look in the stockholders' equity section of the balance sheet. The line labeled "Retained Earnings" is the ending balance for that period. You don't need to calculate it — it's already disclosed there.
How does a net loss affect ending retained earnings?
A net loss reduces ending retained earnings. Instead of adding net income, you subtract the net loss: Ending RE = Beginning RE − Net Loss − Dividends. For example: $250,000 − $40,000 − $10,000 = $200,000.
What is the difference between ending retained earnings and net income?
Net income is what the company earned in the current period only. Ending retained earnings is the cumulative total of all earnings kept in the business since the company started — it includes net income from all prior periods (minus all dividends ever paid).
← Back to the main guide: Retained Earnings: Complete Guide (Definition, Formula, Examples)
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