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Retained Earnings Formula:
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Retained earnings represent the cumulative net income of a company that is retained by the company rather than distributed to shareholders as dividends. They appear on the balance sheet under shareholders' equity and are used for reinvestment in the business.
The formula for calculating retained earnings is:
Where:
Explanation: This formula shows how much of the company's profits are being reinvested in the business rather than paid out to shareholders.
Details: Retained earnings are crucial for business growth as they represent funds available for reinvestment in operations, debt reduction, or future dividends. They indicate the company's historical profitability and its policy on profit distribution.
Tips: Enter all values in dollars. Beginning retained earnings should be from your previous balance sheet, net income from your income statement, and dividends declared during the period.
Q1: Can retained earnings be negative?
A: Yes, negative retained earnings (accumulated deficit) occur when cumulative losses and dividends exceed cumulative profits.
Q2: Where do I find beginning retained earnings?
A: It's the ending retained earnings from your previous accounting period's balance sheet.
Q3: What's the difference between retained earnings and net income?
A: Net income is profit for one period, while retained earnings are cumulative over the company's lifetime.
Q4: How often should I calculate retained earnings?
A: Typically at the end of each accounting period (monthly, quarterly, or annually).
Q5: What can retained earnings be used for?
A: Common uses include business expansion, debt repayment, acquiring assets, or future dividend payments.