How to Calculate Retained Earnings (Step-by-Step Guide)
How to Calculate Retained Earnings (Step-by-Step Guide)
To calculate retained earnings, add net income to your beginning retained earnings, then subtract any dividends paid. Using this formula — Beginning RE + Net Income − Dividends — gives you the ending retained earnings balance for any period.
This guide walks through the full calculation process with a worked example, explains each input, covers common mistakes to avoid, and includes practice problems so you can test your understanding. Whether you're an accounting student or preparing for the CPA exam, this step-by-step approach will make the calculation second nature.
Key Takeaways
- The formula is: Ending RE = Beginning RE + Net Income − Dividends Paid
- Beginning RE comes from the prior period's ending balance sheet
- Net income comes from the current period's income statement
- Dividends paid reduce retained earnings — only declared and paid dividends count
- Worked example: $250,000 + $70,000 − $30,000 = $290,000
- A net loss uses the same formula but subtracts instead of adds
The Retained Earnings Formula
Ending RE = Beginning RE + Net Income − Dividends Paid
This formula works for every type of business — sole proprietor, partnership, or corporation — and for any accounting period (monthly, quarterly, or annual). The formula is the foundation of the Statement of Retained Earnings, which is a formal financial statement required by GAAP.
For a deeper dive into the formula itself and its variations, see our companion post: Retained Earnings Formula Explained (With Examples).
Step 1: Find the Beginning Retained Earnings
Beginning retained earnings is the retained earnings balance from the end of the prior period. It is the starting point for your current period calculation.
Where to Find It
- Balance sheet (prior year): Look in the stockholders' equity section. The line item "Retained Earnings" on last year's balance sheet is this year's beginning balance.
- Prior year's Statement of Retained Earnings: The "Ending Retained Earnings" line from last year becomes this year's "Beginning Retained Earnings."
- First year of operation: If the company is brand new, beginning RE = $0.
In our worked example, the beginning retained earnings = $250,000.
For more detail on finding and interpreting this figure, see: Beginning Retained Earnings: How to Find & Calculate.
Step 2: Add Net Income (or Subtract Net Loss)
Net income — the bottom line of the income statement — is what flows into retained earnings at the end of the period through closing entries. If the company earned a profit, add it. If the company recorded a net loss, subtract it.
Where Net Income Comes From
Net income is the final line on the income statement, calculated as:
You do not recalculate net income when computing retained earnings — you simply take the figure from the income statement and plug it in.
| Scenario | Effect on Retained Earnings |
|---|---|
| Company earns net income of $70,000 | Add $70,000 → RE increases |
| Company records net loss of $20,000 | Subtract $20,000 → RE decreases |
| Company breaks even ($0 net income) | No change to RE (before dividends) |
In our example, Net Income = $70,000.
Step 3: Subtract Dividends Paid
Dividends are distributions to shareholders. When the company pays dividends, it reduces retained earnings — those earnings are no longer "retained." Only actual dividends paid during the period reduce retained earnings in the standard formula.
Types of Dividends That Reduce Retained Earnings
- Cash dividends: The most common type — direct cash payments to shareholders
- Stock dividends: Additional shares issued to shareholders — these also reduce retained earnings (debit) and increase paid-in capital (credit)
- Property dividends: Non-cash assets distributed — reduce RE at fair value
In our example, Dividends Paid = $30,000.
Full Worked Example: Calculating Retained Earnings
- Beginning Retained Earnings (Jan 1): $250,000
- Net Income for the year: $70,000
- Dividends Paid during the year: $30,000
Applying the Formula
| Step | Calculation | Running Balance |
|---|---|---|
| 1. Start with Beginning RE | $250,000 | $250,000 |
| 2. Add Net Income | $250,000 + $70,000 | $320,000 |
| 3. Subtract Dividends | $320,000 − $30,000 | $290,000 |
This figure appears on the balance sheet under stockholders' equity as of December 31.
The company retained $40,000 of profit this year (net income of $70,000 less dividends of $30,000). This is the net change in retained earnings for the period.
This $290,000 is also the ending retained earnings — it becomes next year's beginning retained earnings balance.
Formula Variations You May Encounter
When There Is a Net Loss
Example: $250,000 − $40,000 − $30,000 = $180,000
When No Dividends Are Paid
Example: $250,000 + $70,000 = $320,000
With Prior Period Adjustments
Ending RE = Adjusted Beginning RE + Net Income − Dividends
Prior period adjustments are corrections for material accounting errors discovered in a later period. They adjust the beginning RE balance (not the current period's income) and are disclosed in the financial statements.
Common Mistakes When Calculating Retained Earnings
| Mistake | Correct Approach |
|---|---|
| Using revenue instead of net income | Always use the bottom-line net income figure from the income statement |
| Adding dividends instead of subtracting | Dividends reduce RE — always subtract them |
| Using current year's beginning RE instead of prior year's ending RE | Beginning RE = prior period's closing RE balance |
| Confusing retained earnings with cash | RE is an equity item; cash is an asset — they are separate |
| Forgetting prior period adjustments | Check if any error corrections need to adjust beginning RE before applying the formula |
Practice Problems
Problem 1
A company has beginning retained earnings of $150,000, reports net income of $45,000, and pays dividends of $15,000. What is ending retained earnings?
Problem 2
A company's beginning RE is $400,000. They record a net loss of $60,000 and pay dividends of $20,000. What is ending retained earnings?
Problem 3 (Standard Example)
Beginning RE = $250,000, Net Income = $70,000, Dividends = $30,000. Calculate ending retained earnings.
Ready to see how this calculation is presented as a formal financial statement? Read: Statement of Retained Earnings: Format, Example & How to Prepare.
For context on where retained earnings fit in the broader financial picture, see our guide on What is a Financial Statement.
Practice More Retained Earnings Problems with CPA Prep
The CPA FAR exam tests retained earnings calculations, statement preparation, and prior period adjustments. Our Surgent CPA Review Course includes hundreds of practice MCQs and task-based simulations covering retained earnings and all stockholders' equity topics.
Related Accounting Guides
- Bad Debt Expense: Complete Guide — Learn how uncollectible accounts affect retained earnings through net income
- Goodwill Impairment: Complete Guide — Understand how impairment charges reduce net income and therefore retained earnings
- IAS 40 Investment Property Guide — Fair value gains on investment property increase net income and retained earnings under IFRS
Frequently Asked Questions
How do you calculate retained earnings from a balance sheet?
If you only have two balance sheets and an income statement, calculate: Ending RE = Beginning RE (from prior balance sheet) + Net Income − Dividends Paid. Alternatively, look for the retained earnings line directly in the stockholders' equity section of the current balance sheet.
What is the retained earnings formula?
Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends Paid. This is the universal formula used in GAAP accounting.
Do you add or subtract dividends when calculating retained earnings?
Always subtract dividends. Dividends represent profits paid out to shareholders, so they reduce the amount retained in the business.
What if beginning retained earnings is not given?
Look at the prior year's balance sheet — the ending retained earnings from that period equals this period's beginning retained earnings. For a company's first year, beginning RE is zero.
Can retained earnings be calculated monthly?
Yes. The same formula applies to any period — monthly, quarterly, or annual. Many companies prepare interim retained earnings calculations for internal reporting even if the formal statement is annual.
What is net change in retained earnings?
Net change = Net Income − Dividends Paid. In our example: $70,000 − $30,000 = $40,000 net increase. This tells you how much retained earnings grew (or shrank) during the period, before considering the opening balance.
← Back to the main guide: Retained Earnings: Complete Guide (Definition, Formula, Examples)
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