The retained earnings formula is Beginning Retained Earnings + Net Income (or − Net Loss) − Dividends = Ending Retained Earnings. It shows how much profit a company has kept after paying shareholders.
Retained earnings are cumulative, so the balance builds over the company’s whole life. This guide shows how to calculate it, where to find each number, and which mistakes to avoid.
What Is the Retained Earnings Formula?
The retained earnings formula measures the total profit a company has kept in the business after paying dividends. It gives you the ending balance for any accounting period.
Retained earnings sit in the shareholders’ equity section of the balance sheet. Other names for the same idea include accumulated earnings, undistributed profits, and retained income. Older books sometimes say “earned surplus.”
The formula is the same under US GAAP and IFRS. No major change to the formula itself has been announced for 2025–2026.
Retained Earnings Formula Explained
Each part of the formula comes from a different place in your financial statements. The table below shows what each part means and where to find it.
| Component | What It Means | Where to Find It |
| Beginning retained earnings | Last period’s ending balance | Prior balance sheet or statement of retained earnings |
| Net income (or loss) | Profit or loss for the period | Income statement |
| Cash dividends | Cash paid to shareholders | Statement of cash flows (financing section) |
| Stock dividends | Shares given to shareholders | Statement of changes in equity |
| Ending retained earnings | Current balance | Current balance sheet |
A fuller version of the formula is: Beginning RE + Net Income/Loss − Cash Dividends − Stock Dividends = Ending RE.
How to Calculate Retained Earnings Step by Step
You calculate retained earnings in five steps. Start with the old balance, add profit, subtract dividends, and report the result.
- Find beginning retained earnings on the prior balance sheet.
- Get net income or net loss from the current income statement.
- Add up all dividends paid, both cash and stock.
- Apply the formula: Beginning RE + Net Income − Dividends.
- Report the ending balance in the shareholders’ equity section of the balance sheet.
A new business starts with a beginning balance of $0. After an acquisition or merger, use the opening balance sheet figure.
Retained Earnings Formula Example
Here is a simple example. A company starts the year with $200,000 in retained earnings. It earns $50,000 in net income and pays $40,000 in dividends.
$200,000 + $50,000 − $40,000 = $210,000
Now see how it builds over several years:
| Year | Beginning RE | Net Income | Dividends | Ending RE |
| 1 | $0 | $100,000 | $20,000 | $80,000 |
| 2 | $80,000 | $150,000 | $30,000 | $200,000 |
| 3 | $200,000 | $50,000 | $40,000 | $210,000 |
Year 3 starts with $200,000, which includes all the profits kept in earlier years. That is what “cumulative” means.
Where to Find Each Component
Every number in the formula already exists in your standard financial statements. You only need to know which statement to open.
Beginning retained earnings is on last period’s balance sheet, in the equity section. Net income is the bottom line of the income statement. Do not use revenue, gross profit, or operating income.
Dividends need care. Cash dividends show in the cash flow statement. Stock dividends show in the statement of changes in equity.
Include every type of dividend:
- Cash dividends, both common and preferred
- Stock dividends, small and large
- Property dividends
- Owner draws, for sole proprietors and partnerships
Stock dividends also reduce retained earnings. The value moves from retained earnings into paid-in capital.
Retained Earnings on Financial Statements
Retained earnings appear in the shareholders’ equity section of the balance sheet. They also show up in three other places:
- The statement of retained earnings, a standalone statement
- The statement of changes in equity, used under IFRS
- The notes, if part of the balance is restricted
Many US companies prepare a separate statement of retained earnings. IFRS companies usually show the same information inside the broader statement of changes in equity. Even if no one requires it, a statement of retained earnings helps with audits and lender reviews.
Retained Earnings vs Net Income: What’s the Difference?
Net income is profit for one period. Retained earnings are the running total of all net income, minus all dividends, since the company began.
| Concept | Key Difference from Retained Earnings |
| Net income | One period, not cumulative |
| Revenue | Top line, before expenses |
| Cash | Liquid assets, not an accounting total |
| Shareholders’ equity | Retained earnings are one part of it |
| Accumulated deficit | Same thing as retained earnings, but negative |
Can Retained Earnings Be Negative?
Yes. Negative retained earnings are called an accumulated deficit. It happens when total losses and dividends are bigger than total profits over the company’s life.
Common causes include early-stage losses, heavy R&D spending, and paying too much in dividends. A negative balance is common for startups and fast-growing companies. It is not always a warning sign, especially if cash flow is strong or investors are backing the business.
Still, a long-term deficit deserves a clear explanation. Lenders and investors will ask about it.
Are Retained Earnings the Same as Cash?
No. Retained earnings are an accounting figure, not money in the bank. The profit may have been spent on equipment, inventory, debt payments, or other assets.
A company can have high retained earnings and very little cash. To check real liquidity, read the statement of cash flows next to the balance sheet.
Common Mistakes When Calculating Retained Earnings
Most errors come from using the wrong number or leaving something out. These are the most common ones:
| Mistake | Correct Approach |
| Using revenue instead of net income | Use net income only |
| Forgetting to subtract dividends | Subtract cash and stock dividends |
| Adding a net loss | Subtract it |
| Using the wrong beginning balance | Use last period’s exact ending balance |
| Treating RE as spendable cash | Check the cash flow statement |
| Ignoring prior period adjustments | Adjust the beginning balance |
| Mixing accounting periods | Keep every figure in the same period |
Check your beginning balance against last period’s ending balance every time. Small errors grow over the years.
How Do Prior Period Adjustments Affect Retained Earnings?
Prior period adjustments change the beginning retained earnings balance, not the current income statement. They fix material errors from earlier periods.
This follows FASB ASC 250 in the US and IAS 8 under IFRS. ASC 505 continues to guide equity disclosures. The adjustment must be disclosed in the notes.
A simple reconciliation looks like this:
- Beginning RE (from prior balance sheet)
- +/− Prior period adjustments
- = Adjusted beginning RE
- Net income
- − Dividends
- = Ending RE (should match the balance sheet)
If you find a material error, talk to your accountant or auditor before you adjust anything.
What Is Appropriated Retained Earnings?
Appropriated retained earnings are a portion set aside for a specific purpose, so it is not available for dividends. Reasons include debt covenants, legal rules, or board decisions for a project.
Appropriation does not reduce total retained earnings or total equity. It only labels part of the balance as restricted. Under ASC 505-10-45-3, a company may do this if it shows the amount within shareholders’ equity and identifies it clearly.
| Type | Available for Dividends? | Purpose |
| Unappropriated | Yes | General use |
| Appropriated | No | Debt covenants, legal reserves, board-designated projects |
What Is the Retention Ratio Formula?
The retention ratio shows the share of profit a company keeps. The formula is (Net Income − Dividends) ÷ Net Income. It also equals 1 minus the dividend payout ratio.
If a company earns $100,000 and pays $30,000 in dividends, its retention ratio is 70%. The payout ratio is 30%. Together they always add up to 100%.
Typical levels differ by industry. Tech companies often keep close to 100% and pay no dividends. Mature utilities may keep far less, around 30–40%.
How Do I Forecast Future Retained Earnings?
Use this formula: Forecasted RE = Current RE + (Forecasted Net Income × (1 − Target Payout Ratio)).
Say current RE is $500,000, expected net income is $200,000, and the payout ratio is 25%. Next year’s RE is 500,000+(200,000 × 0.75) = $650,000.
Be clear about your assumptions: growth rate, profit margin, and dividend policy. In financial models, link retained earnings to net income and dividends so the balance sheet stays in balance.
What Are the Legal Restrictions on Retained Earnings?
Dividend rules vary by state. Many states stop a company from paying dividends that would push retained earnings below the cost of treasury stock, or below legal capital. Loan agreements may add their own limits through debt covenants.
Public companies must disclose restrictions on retained earnings to the SEC. Always check your loan terms and state corporate law before paying dividends.
What Is a Good Retained Earnings Balance?
A good balance grows steadily, stays positive, and fits the company’s size, industry, and stage of life.
Signs of health:
- Growth over several periods
- A clear plan for reinvestment
- Compliance with covenants and legal limits
Red flags:
- A long-term accumulated deficit
- A falling trend over many periods
- Large unexplained drops
- Dividends that are high compared with earnings
- Frequent prior period adjustments
How Do Investors Use Retained Earnings in Analysis?
Investors use retained earnings to see how much profit a company reinvests and how well it uses that money. The key tool is the sustainable growth rate: SGR = Retention Ratio × ROE.
A company that keeps more profit and earns a high return on equity can grow faster without borrowing. Analysts also compare retention ratios with industry peers.
Retained Earnings for Startups and Owner Draws
Startups should expect negative retained earnings while they invest in growth. A common path is to reinvest nearly everything at first, keep most profit during growth, balance retention and dividends at maturity, and pay out more later.
Sole proprietorships and partnerships do not pay dividends. Instead, owner draws reduce the owner’s equity, and they should be tracked just as carefully.
Retained Earnings Formula: Quick Reference
- Formula: Beginning RE + Net Income − Dividends = Ending RE
- Location: Shareholders’ equity on the balance sheet
- Negative balance: Accumulated deficit
- Retention ratio: (Net Income − Dividends) ÷ Net Income
- Forecast: Current RE + Net Income × (1 − Payout Ratio)
Latest Updates (2025–2026)
The formula has not changed under US GAAP or IFRS. ASC 505-10 still governs appropriation disclosures, and IAS 8 still covers prior period adjustments. SEC disclosure rules for restricted retained earnings are unchanged. State dividend laws still vary, with no major uniform changes.
Accounting tools such as QuickBooks and Xero keep automating the calculation, which cuts manual errors. Educational guides were refreshed too. Corporate Finance Institute updated its retained earnings guide in September 2026, and QuickBooks updated its guides in 2025.
Conclusion
The retained earnings formula is simple: start with last period’s balance, add net income, and subtract all dividends. The hard part is using the right numbers and keeping the balance reconciled from year to year.
Remember that retained earnings are not cash, can be negative, and add up over time. Track them every period, and review them before big decisions such as borrowing or raising investment.
FAQs
What is the retained earnings formula?
Beginning Retained Earnings + Net Income (or − Net Loss) − Dividends = Ending Retained Earnings.
Where do I find beginning retained earnings?
On the prior period’s balance sheet in the equity section, or on the prior statement of retained earnings. A new business starts at $0.
Do stock dividends reduce retained earnings?
Yes. Both cash and stock dividends reduce it. Stock dividends move value into paid-in capital.
Can retained earnings be negative?
Yes. A negative balance is called an accumulated deficit. It occurs when losses and dividends exceed profits over time.
Are retained earnings the same as cash?
No. They are an accounting total. The cash may already be invested in assets or used to pay debt.
What is the difference between retained earnings and net income?
Net income is one period’s profit. Retained earnings are the running total of profits kept since the company began.
Do retained earnings carry over to the next year?
Yes. This is a permanent account, so the ending balance becomes next year’s beginning balance.
How do prior period adjustments affect retained earnings?
They correct the beginning balance for material errors and bypass the current income statement.
What is appropriated retained earnings?
It is a part of retained earnings set aside for a specific purpose and not available for dividends.
What is the retention ratio?
It is the share of net income kept in the business: (Net Income − Dividends) ÷ Net Income.