How to Calculate Retained Earnings
Calculate retained earnings from beginning retained earnings, net income, and dividends, with examples and accounting checks.
Retained earnings are profits a company keeps instead of distributing as dividends. Use
ending retained earnings = beginning retained earnings + net income − dividends. The ending balance appears in shareholders' equity and becomes the beginning balance for the next period.
For related profit measures, see gross vs net and the margin calculator.
What retained earnings measure
Retained earnings are cumulative. They do not show just this month's profit. They show the running total of profits kept in the business after dividends and distributions.
They live on the balance sheet. Net income comes from the income statement for one period. Retained earnings sit in equity and carry forward from period to period.
Step-by-step calculation
Start with the retained earnings balance from the prior period. Add net income from the current period, then subtract dividends or owner distributions.
That ending balance becomes the opening retained earnings for the next period.
What happens after a loss
A net loss reduces retained earnings. If losses and dividends exceed the beginning balance, retained earnings can become negative. That negative balance is often called an accumulated deficit.
A negative balance does not automatically mean the business has no cash. It means cumulative retained profits have been exhausted by losses and distributions.
Retained earnings are not cash
Retained earnings can be reinvested into inventory, equipment, payroll, debt repayment, or other assets. That is why the retained earnings line can be positive even when the bank balance is tight.
Read retained earnings as an equity measure, not as a cash drawer.
Common mistakes
Do not use revenue instead of net income. Revenue is sales before expenses. Net income is profit after expenses.
Do not forget dividends. Distributions reduce retained earnings even when the business was profitable.
Do not restart the balance every year. Retained earnings carry forward. Only net income is period-specific.
Common questions
Retained earnings appear in the shareholders' equity section of the balance sheet.
No. Net income is profit for one period. Retained earnings are cumulative profits kept in the business after dividends.
Yes. A negative retained earnings balance is possible when cumulative losses and dividends exceed cumulative profits.
Dividends decrease retained earnings because they distribute profit out of the company instead of keeping it in equity.
Retained earnings connect the income statement to the balance sheet. Use beginning retained earnings, net income, and dividends, then carry the ending balance into the next period.
