The retained earnings formula is: Ending Retained Earnings = Beginning Retained Earnings + Net Income (or − Net Loss) − Dividends. This simple retained earnings formula shows how much profit a company has kept after paying owners. The core formula is stable, but accounting treatment can vary by framework, jurisdiction, and the exact transaction.
What Are Retained Earnings?
Retained earnings are the cumulative profits a company has kept after accounting for losses and distributions to shareholders. They sit inside shareholders’ equity on the balance sheet.
They also connect two key statements. Net income comes from the income statement and flows into retained earnings on the balance sheet.
Retained earnings are an equity balance, not a cash account. A company can show high retained earnings and still have little cash, because profits may have been spent on inventory, equipment, receivables, or debt repayment.
Retained Earnings Formula
Ending retained earnings equal the beginning balance, plus net income, minus dividends.
Ending RE = Beginning RE + Net Income or Loss − Dividends
A more complete version adds prior-period adjustments:
Ending RE = Beginning RE + Net Income or Loss − Dividends Declared ± Prior-Period Adjustments
Meaning of each variable
| Component | Meaning | Effect on ending retained earnings |
| Beginning retained earnings | Prior period’s closing balance | Starting point |
| Net income | Profit for the current period | Increases |
| Net loss | Loss for the current period | Decreases |
| Dividends | Distributions to shareholders | Decreases |
| Prior-period adjustment | Correction or retrospective change | Increases or decreases |
| Ending retained earnings | Closing cumulative balance | Final result |
How to Calculate Retained Earnings
You calculate retained earnings in five steps: find the opening balance, add profit or subtract loss, subtract dividends, adjust if needed, and check the result.
- Find beginning retained earnings. Use last period’s ending balance from the comparative balance sheet or the previous statement of changes in equity. For a new company, the opening balance is generally zero, unless the entity is being reorganized or acquired.
- Add net income or subtract a net loss. Use the figure after expenses. Don’t subtract expenses again, or you will double-count them.
- Subtract dividends. Cash dividends and other distributions to shareholders reduce the balance.
- Add or subtract adjustments. These include corrections of material prior-period errors and accounting-policy changes.
- Verify the ending balance. Check that it matches the equity section of the balance sheet.
Retained Earnings Formula Examples
The examples below show how the formula works in common situations.
Example with net income. A company starts the year with $50,000 in retained earnings. It earns $20,000 and pays $5,000 in dividends.
$50,000 + $20,000 − $5,000 = $65,000
Example with a net loss. The same company starts with $50,000, loses $12,000, and pays no dividends.
$50,000 − $12,000 = $38,000
Example for a new business. A new corporation has a zero opening balance. It earns $30,000 and declares $10,000 in dividends.
$0 + $30,000 − $10,000 = $20,000
Example with a prior-period adjustment. A company starts with $80,000, earns $25,000, and declares $8,000 in dividends. It also finds a material error from an earlier year that lowers equity by $4,000.
$80,000 + $25,000 − $8,000 − $4,000 = $93,000
Example with stock dividends. A stock dividend generally reduces retained earnings and increases another equity account. The exact amount depends on the size of the dividend and the applicable accounting rules, so check your framework before calculating.
What Increases and Decreases Retained Earnings?
Net income is the main thing that increases retained earnings. Net losses and dividends are the main things that decrease them.
| Increases retained earnings | Decreases retained earnings |
| Net income | Net loss |
| Corrections that increase opening equity | Dividends |
| Some accounting-policy adjustments | Certain prior-period error corrections |
| Certain direct equity credits | Certain direct equity charges |
Retained earnings are cumulative. They do not reset to zero each year. Temporary income and expense accounts are closed into equity at year-end, but the retained earnings account itself carries forward.
Do Dividends Declared or Paid Reduce Retained Earnings?
In accounting terms, the reduction is generally tied to dividends declared, not the later cash payment. Many beginner guides say “dividends paid,” but that is a simplification.
Three dates matter:
| Dividend event | Typical accounting significance |
| Declaration | May create a payable and reduce retained earnings |
| Record date | Identifies eligible shareholders |
| Payment | Reduces cash and the dividend payable |
Stock dividends move value within equity. Property dividends distribute non-cash assets and need proper measurement. Always state in your example whether you used declared or paid dividends.
Statement of Retained Earnings
A statement of retained earnings is a short report that shows how the balance changed during a period. It follows the same logic as the formula.
A simple format looks like this:
| Item | Amount |
| Beginning retained earnings | $50,000 |
| Add: Net income | $20,000 |
| Less: Dividends | ($5,000) |
| Ending retained earnings | $65,000 |
Larger companies often show this movement in a statement of changes in equity instead. IFRS educational material lists beginning retained earnings, dividends, prior-period error corrections, accounting-policy restatements, and ending retained earnings as key parts of that statement.
Where Are Retained Earnings Reported?
Retained earnings are reported in the shareholders’ equity section of the balance sheet. You won’t find them on the income statement.
The income statement shows net income for one period. The balance sheet shows the cumulative result. This difference confuses many readers, so keep them separate.
You can also use retained earnings to check your work. Total assets must equal liabilities plus equity. If your retained earnings figure is wrong, the balance sheet usually won’t balance.
Retained Earnings vs. Net Income, Cash, and Equity
Retained earnings are a cumulative equity balance. Net income is one period’s profit, and cash is an asset. Mixing them up is one of the most common mistakes.
| Concept | Period or cumulative? | Where reported | Main meaning |
| Net income | Period-specific | Income statement | Profit for the period |
| Retained earnings | Cumulative | Balance sheet equity | Earnings kept after distributions |
| Cash | Point in time | Balance sheet assets | Liquid funds on hand |
| Shareholders’ equity | Cumulative | Balance sheet equity | Owners’ residual interest |
Retained earnings are only one part of total equity. Equity can also include contributed capital, additional paid-in capital, treasury shares, and accumulated other comprehensive income.
The word “reserve” can also mislead. A retained earnings reserve may have a different technical meaning, so don’t use the terms interchangeably.
Negative Retained Earnings
Negative retained earnings, called an accumulated deficit, happen when cumulative losses, dividends, or adjustments exceed cumulative profits.
A negative balance doesn’t always mean the company lost money this year. A profitable company can still show a deficit if it has large historical losses or big past distributions.
It also doesn’t automatically mean bankruptcy. It is a signal to look closer at the company’s history, cash position, and plans.
Adjustments and Accounting Standards
Prior-period errors and policy changes can change the basic formula. Under IAS 8, retrospective adjustments for earlier periods are generally made to the opening balance of the affected equity component, usually retained earnings.
Current IFRS materials state that material prior-period errors are generally corrected retrospectively when practicable. IFRS 18 materials also say restatements affect opening retained earnings unless another equity component is required.
The basic roll-forward is the same under U.S. GAAP and IFRS: beginning balance plus profit or loss, less distributions. Detailed dividend treatment depends on the transaction and the framework. Search results from 2025 and 2026 show the formula itself hasn’t changed. Recent updates mainly concern presentation, standard-setting, software, and local rules.
Practical Tools: Excel and Calculators
In Excel or Google Sheets, you can calculate retained earnings with one formula. Put beginning retained earnings in B1, net income in B2, dividends in B3, and adjustments in B4. Then use:
=B1+B2-B3+B4
Enter a net loss as a negative number in B2. Enter adjustments as positive or negative, depending on their effect.
A good retained earnings calculator asks for the same four inputs. Before you trust the result, run this checklist:
- Did you use net income, not revenue?
- Did you subtract dividends?
- Is the opening balance last period’s ending balance?
- Did you include adjustments, acquisitions, or currency translation?
- Does the result match the balance sheet?
Common Mistakes
Most errors come from using the wrong number or forgetting a step. Watch for these:
- Using revenue instead of net income
- Subtracting expenses after already using net income
- Forgetting dividends
- Mixing up beginning and ending balances
- Ignoring a net loss
- Treating retained earnings as cash or as an asset
- Assuming retained earnings reset each year
- Ignoring stock or property dividends
- Omitting prior-period adjustments
- Reading an accumulated deficit as a current-year loss
Sole proprietors also need care. Retained earnings is mainly a corporate concept. Sole proprietorships generally use owner’s capital and drawings instead.
Conclusion
The retained earnings formula is simple: beginning balance, plus net income or loss, minus dividends, with adjustments when needed. Remember that retained earnings are an equity balance, not cash. Treat dividends and prior-period adjustments carefully, and check the framework that applies to your company.
FAQs
Are retained earnings cash?
No. Retained earnings are an equity balance, while cash is an asset. Profits may have been reinvested in equipment, inventory, receivables, or debt repayment.
Do retained earnings reset every year?
No. Retained earnings are cumulative and carry forward from one period to the next. Only temporary income and expense accounts are closed into equity.
Can retained earnings be negative?
Yes. A negative balance is called an accumulated deficit. It occurs when cumulative losses, dividends, or adjustments exceed cumulative profits.
Are retained earnings taxable?
Not automatically. Retained earnings are an accounting measure. Tax treatment depends on the jurisdiction, entity type, tax rules, and differences between accounting income and taxable income.
How do retained earnings affect dividends?
Dividends reduce retained earnings, but a positive balance doesn’t mean a company can legally pay them. Legal distribution capacity may depend on local corporate law, solvency tests, capital-maintenance rules, loan covenants, and company documents.
Do stock dividends reduce retained earnings?
Generally yes. A stock dividend usually moves an amount from retained earnings to another equity account. The detail depends on its size and the accounting rules that apply.