Retained Earnings Formula Explained (With Examples)
Retained Earnings Formula Explained (With Examples)
The retained earnings formula is: Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends Paid. This simple equation calculates how much profit a company has kept after distributing dividends, and it forms the basis of the Statement of Retained Earnings.
This post breaks down every component of the retained earnings formula, works through multiple scenarios (profitable year, loss year, no dividends), and covers the formula variations you'll encounter in accounting courses and on the CPA exam. All examples use consistent figures so you can follow the logic from start to finish.
Key Takeaways
- The retained earnings formula: Ending RE = Beginning RE + Net Income − Dividends
- All three inputs come from different financial statements or prior periods
- Net losses use the formula in reverse — they subtract from RE
- With no dividends: Ending RE = Beginning RE + Net Income
- Prior period adjustments modify beginning RE before applying the formula
- Standard example: $250,000 + $70,000 − $30,000 = $290,000
The Retained Earnings Formula
Ending RE = Beginning RE + Net Income − Dividends Paid
Or equivalently:
Ending RE = Beginning RE + Net Income (or − Net Loss) − Cash Dividends − Stock Dividends
The retained earnings formula is used in three primary contexts:
- Preparing the Statement of Retained Earnings
- Verifying the equity section of the balance sheet
- Solving exam questions where you must find a missing variable
For a broader understanding of the retained earnings concept, start with the Retained Earnings Complete Guide.
Breaking Down Each Component of the Retained Earnings Formula
Component 1: Beginning Retained Earnings
Beginning retained earnings (beginning RE) is the retained earnings balance at the start of the current period. It equals the ending retained earnings from the prior period's balance sheet.
| Situation | Beginning RE Value |
|---|---|
| Established company | Prior year's ending RE balance (from last year's balance sheet) |
| First year of operations | $0 (company has no prior retained earnings) |
| After an error correction | Restated prior year RE (adjusted for the correction) |
In our standard example: Beginning RE = $250,000
Component 2: Net Income (or Net Loss)
Net income flows from the income statement into retained earnings at period-end. It is the single most important driver of retained earnings growth.
Key points about this component:
- Net income is always taken from the current period's income statement
- A positive net income increases retained earnings
- A net loss decreases retained earnings
- Other comprehensive income (OCI) does not go through retained earnings — it goes to accumulated OCI, a separate equity account
In our standard example: Net Income = $70,000
For more on how net income relates to equity items like OCI, see: Other Comprehensive Income: Examples & Disclosure.
Component 3: Dividends Paid
Dividends reduce retained earnings because they represent profits paid out to shareholders rather than kept in the business.
| Dividend Type | Effect on RE | Note |
|---|---|---|
| Cash dividends | Reduces RE | Most common type |
| Stock dividends | Reduces RE | Transfer from RE to paid-in capital |
| Property dividends | Reduces RE | Recorded at fair value of asset |
| Liquidating dividends | Reduces paid-in capital | NOT a reduction of RE |
In our standard example: Dividends Paid = $30,000
Example 1: Profitable Year With Dividends (Standard)
This is the most common exam scenario — a company that earns a profit and distributes some of it as dividends.
Beginning RE: $250,000 | Net Income: $70,000 | Dividends Paid: $30,000
| Item | Amount |
|---|---|
| Beginning Retained Earnings | $250,000 |
| Add: Net Income | $70,000 |
| Less: Dividends Paid | ($30,000) |
| Ending Retained Earnings | $290,000 |
The company retained $40,000 more this year than it paid out — its RE balance grew from $250,000 to $290,000.
Example 2: Net Loss Year
When a company reports a net loss, the retained earnings formula still works the same way — the net loss is a negative figure that reduces RE.
Beginning RE: $250,000 | Net Loss: $40,000 | Dividends Paid: $10,000
| Item | Amount |
|---|---|
| Beginning Retained Earnings | $250,000 |
| Less: Net Loss | ($40,000) |
| Less: Dividends Paid | ($10,000) |
| Ending Retained Earnings | $200,000 |
Example 3: Profitable Year, No Dividends
Growth-stage companies often pay no dividends — all profits stay in the business to fund expansion.
Beginning RE: $250,000 | Net Income: $70,000 | Dividends Paid: $0
| Item | Amount |
|---|---|
| Beginning Retained Earnings | $250,000 |
| Add: Net Income | $70,000 |
| Less: Dividends Paid | $0 |
| Ending Retained Earnings | $320,000 |
With no dividends, the entire $70,000 net income stays in the business, growing RE from $250,000 to $320,000.
Example 4: Prior Period Adjustment
When a material accounting error is discovered, it is corrected via a prior period adjustment — not through the current period's income statement. The adjustment modifies beginning retained earnings directly.
Reported Beginning RE: $250,000
Prior Period Error Correction (overstatement of prior year income): −$15,000
Net Income (current year): $70,000 | Dividends Paid: $30,000
| Item | Amount |
|---|---|
| Beginning RE (as previously reported) | $250,000 |
| Less: Prior Period Adjustment | ($15,000) |
| Adjusted Beginning RE | $235,000 |
| Add: Net Income | $70,000 |
| Less: Dividends Paid | ($30,000) |
| Ending Retained Earnings | $275,000 |
Retained Earnings Formula Variations
| Scenario | Formula |
|---|---|
| Standard (profit + dividends) | Beginning RE + Net Income − Dividends |
| Net loss scenario | Beginning RE − Net Loss − Dividends |
| No dividends paid | Beginning RE + Net Income |
| With prior period adjustment | Adjusted Beginning RE + Net Income − Dividends |
| Solving for net income | Net Income = Ending RE − Beginning RE + Dividends |
| Solving for dividends | Dividends = Beginning RE + Net Income − Ending RE |
How to Memorize the Retained Earnings Formula
Use the mnemonic BND = Retained Earnings:
- Beginning RE
- + Net Income
- − Dividends
- = Ending RE
Now that you know the formula, see how it's applied step-by-step: How to Calculate Retained Earnings (Step-by-Step Guide).
And see how it generates the ending retained earnings balance used on the balance sheet.
Master Every Retained Earnings Formula Variation on the CPA Exam
The CPA FAR exam tests multiple retained earnings formula scenarios — including prior period adjustments, stock dividends, and error corrections. Our Surgent CPA Review Course builds your formula fluency with adaptive practice questions and video explanations.
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 About the Retained Earnings Formula
What is the retained earnings formula?
Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends Paid. This formula applies to every accounting period regardless of company size or industry.
How does net income affect retained earnings?
Net income increases retained earnings. A net loss decreases retained earnings. The income statement result flows directly into retained earnings at period-end through closing journal entries.
How do stock dividends affect the retained earnings formula?
Stock dividends reduce retained earnings and increase paid-in capital by the same amount. The total equity is unchanged, but retained earnings decreases. Include stock dividends in the "Dividends" line of the formula.
Can I rearrange the retained earnings formula to solve for net income?
Yes. Net Income = Ending RE − Beginning RE + Dividends Paid. This rearrangement is tested on the CPA exam when net income is the unknown variable.
Does other comprehensive income (OCI) affect retained earnings?
No. OCI bypasses the income statement and retained earnings — it goes directly to "Accumulated Other Comprehensive Income" (AOCI), a separate equity account. Only items flowing through net income affect retained earnings.
What happens to the retained earnings formula when there is a prior period error?
The beginning retained earnings is restated (adjusted) before applying the formula. The error correction is shown on the Statement of Retained Earnings as an adjustment to the opening balance, not as a current-period item.
← Back to the main guide: Retained Earnings: Complete Guide (Definition, Formula, Examples)
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