To calculate retained earnings, you need to follow this simple formula:
Retained Earnings = Beginning Retained Earnings + Net Income (or Loss) - Dividends
Here's a breakdown of each component:
1. **Beginning Retained Earnings**: This is the retained earnings balance from the previous accounting period. It can be found on the balance sheet of the previous period's financial statements.
2. **Net Income (or Loss)**: Net income represents the company's total revenue minus total expenses for the current accounting period. If the company has a net profit, it's added to retained earnings. If the company has a net loss, it's subtracted from retained earnings.
3. **Dividends**: Dividends are payments made to shareholders as a distribution of profits. If the company pays dividends during the accounting period, it reduces retained earnings.
Once you have the values for beginning retained earnings, net income (or loss), and dividends, you can plug them into the formula to calculate the retained earnings for the current accounting period.
For example, let's say a company had beginning retained earnings of $100,000, net income of $50,000, and paid dividends of $10,000 during the year. The calculation would be:
Retained Earnings = $100,000 (Beginning Retained Earnings) + $50,000 (Net Income) - $10,000 (Dividends)
= $140,000
So, the retained earnings for the current accounting period would be $140,000. This amount represents the accumulated profits that have been retained by the company since its inception, after accounting for dividends and net income or loss.