How Do You Calculate Retained Earnings? Formula, Example & Step-by-Step Guide

What Are Retained Earnings?

Retained earnings are the cumulative profits a company has earned and kept instead of distributing them to shareholders as dividends.

They normally appear in the shareholders’ equity section of the balance sheet.

Each accounting period, the retained earnings balance generally:

• Increases when the company earns net income
• Decreases when the company reports a net loss
• Decreases when dividends are declared
• Carries forward into the next accounting period

This means retained earnings are cumulative.

If a company earned $100,000 last year and retained all of it, that amount does not disappear when the new year starts. It becomes part of the beginning retained earnings balance for the next period.

Retained Earnings Formula

The standard calculation is:

Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends

A more complete version can be written as:

Ending Retained Earnings = Beginning Retained Earnings + Net Income (or − Net Loss) − Dividends ± Applicable Prior-Period Adjustments

Each part of the formula serves a different purpose.

Beginning Retained Earnings

This is the retained earnings balance at the start of the accounting period.

Normally:

Current Period Beginning Retained Earnings = Previous Period Ending Retained Earnings

If the company ended 2025 with $300,000 in retained earnings, it would normally begin 2026 with $300,000.

Net Income

Net income is the company's profit for the current reporting period after revenues and expenses have been considered.

Net income increases retained earnings.

Net Loss

If expenses exceed revenues, the company reports a net loss.

A net loss reduces retained earnings.

Dividends

Dividends represent distributions to shareholders and reduce the amount of accumulated earnings retained by the business.

One accounting nuance is worth noting here.

Many simplified explanations say to subtract dividends paid. However, from an accounting perspective, a cash dividend generally reduces retained earnings when the board declares the dividend; the later cash payment reduces the dividend payable and cash accounts.

For a basic retained earnings calculation, you will commonly see:

Beginning RE + Net Income − Dividends = Ending RE

How Do You Calculate Retained Earnings Step by Step?

Assume a business wants to calculate retained earnings for 2026.

Step 1: Find Beginning Retained Earnings

Look at the prior period's balance sheet or statement of shareholders' equity.

Suppose beginning retained earnings are:

$250,000

Step 2: Find Net Income or Net Loss

Look at the bottom line of the current period's income statement.

Suppose the company earned:

Net Income = $120,000

Step 3: Determine Dividends

Assume the company declared:

Dividends = $30,000

Step 4: Apply the Formula

Ending Retained Earnings = $250,000 + $120,000 − $30,000

Therefore:

Ending Retained Earnings = $340,000

The company ends the period with $340,000 of accumulated retained earnings.

That $340,000 would normally become the beginning retained earnings balance for the next accounting period.

Retained Earnings Example

Consider a fictional company called Northstar Retail Group.

At the beginning of 2026, Northstar has:

Beginning retained earnings: $500,000

During the year, it earns:

Net income: $180,000

The company declares:

Dividends: $50,000

The calculation is:

$500,000 + $180,000 − $50,000 = $630,000

Northstar's ending retained earnings are therefore:

$630,000

What happened during the year?

The company generated $180,000 in additional earnings.

Of those earnings, $50,000 was distributed to shareholders.

The remaining $130,000 increased accumulated retained earnings from $500,000 to $630,000.

What If the Company Has a Net Loss?

The same formula works when a company loses money.

Suppose a business begins the year with:

Beginning retained earnings: $200,000

It records:

Net loss: $60,000

It declares no dividends.

Instead of adding $60,000, subtract the loss:

$200,000 − $60,000 = $140,000

Ending retained earnings are:

$140,000

A loss reduces the accumulated profit that had previously been retained.

Accounting references therefore commonly express the formula as beginning retained earnings plus net income or minus net loss, less dividends.

What If No Dividends Are Paid?

If a company does not declare dividends, all current-period net income generally increases retained earnings.

For example:

Beginning retained earnings = $80,000
Net income = $25,000
Dividends = $0

Calculation:

$80,000 + $25,000 − $0 = $105,000

Ending retained earnings:

$105,000

This does not necessarily mean the company has $105,000 available in cash.

More on that distinction shortly.

How Do You Calculate Retained Earnings for a New Business?

A newly formed business may begin with zero retained earnings because it has not yet accumulated prior-period profits.

Suppose a new company starts with:

Beginning retained earnings = $0

During its first year:

Net income = $70,000
Dividends = $10,000

Then:

$0 + $70,000 − $10,000 = $60,000

Ending retained earnings equal:

$60,000

If the startup instead loses $70,000 and has no prior earnings, it could end with:

Retained Earnings = −$70,000

A negative retained earnings balance is commonly called an accumulated deficit.

Where Do You Find Retained Earnings?

Retained earnings normally appear in the stockholders' or shareholders' equity section of the balance sheet.

A simplified equity section might contain:

Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income/Loss
Total Shareholders' Equity

Retained earnings are therefore an equity account, not an asset account.

The change in retained earnings may also be shown in:

• A statement of retained earnings
• A statement of shareholders' equity
• A statement of changes in equity

These reports make it easier to understand how the balance moved from the beginning to the end of the period.

Statement of Retained Earnings Example

A statement of retained earnings can be very simple.

For Northstar Retail Group:

Beginning Retained Earnings
$500,000

Add: Net Income
$180,000

Less: Dividends
($50,000)

Ending Retained Earnings
$630,000

The statement essentially acts as a bridge between current-period profitability and accumulated equity.

AccountingCoach notes that a retained earnings statement may include beginning retained earnings, current-period net income, dividends, applicable prior-period adjustments, and the resulting ending balance.

Where Does Net Income Come From?

Net income comes from the company's income statement.

A simplified calculation is:

Net Income = Revenue − Expenses

For example:

Revenue = $1,000,000
Total expenses = $800,000

Net income:

$1,000,000 − $800,000 = $200,000

That $200,000 then flows into the retained earnings calculation.

If beginning retained earnings were $400,000 and dividends were $75,000:

$400,000 + $200,000 − $75,000 = $525,000

Ending retained earnings equal $525,000.

This is one reason retained earnings are often described as a link between the income statement and balance sheet: net income comes from the income statement and ultimately affects an equity account on the balance sheet.

Retained Earnings vs. Net Income

These terms are related but not interchangeable.

Net Income

Net income measures profit for a specific accounting period.

For example:

2026 net income = $100,000

Retained Earnings

Retained earnings reflect accumulated earnings over multiple accounting periods, after distributions to shareholders and other applicable adjustments.

A company could therefore report:

Current-year net income: $100,000

Ending retained earnings: $1,200,000

The $1.2 million incorporates earnings accumulated from previous periods as well as the current period.

Retained Earnings vs. Revenue

Revenue represents income generated through business activities before expenses are deducted.

Retained earnings are completely different.

Consider:

Revenue = $1,000,000
Expenses = $850,000
Net income = $150,000

The company does not add $1 million to retained earnings.

It generally adds the resulting $150,000 net income, subject to dividends and other applicable adjustments.

So:

Revenue → Expenses → Net Income → Retained Earnings

Confusing revenue with retained earnings can significantly overstate the calculation.

Retained Earnings vs. Cash

This is one of the most important distinctions.

Retained earnings are not cash.

Suppose a company has $2 million of retained earnings.

That does not mean there is $2 million sitting in its bank account.

Those accumulated profits may previously have been used to:

• Purchase inventory
• Buy equipment
• Expand locations
• Repay debt
• Acquire another business
• Fund working capital
• Develop products
• Hire employees

Retained earnings are an equity balance, whereas cash is an asset.

AccountingTools and AccountingCoach both emphasize that a large retained earnings balance does not automatically imply an equivalent cash balance.

Retained Earnings vs. Shareholders' Equity

Retained earnings are one component of shareholders' equity.

They are not necessarily the company's entire equity balance.

Shareholders' equity can include items such as:

• Common stock
• Preferred stock
• Additional paid-in capital
• Retained earnings
• Treasury stock
• Accumulated other comprehensive income or loss

So:

Retained Earnings ≠ Total Shareholders' Equity

Instead:

Retained Earnings = One Component of Shareholders' Equity

What Causes Retained Earnings to Increase?

The primary factor that increases retained earnings is:

Net Income

When the business earns a profit and does not distribute all of it, the retained earnings balance increases.

Suppose:

Beginning RE = $300,000
Net income = $80,000
Dividends = $20,000

The net increase is:

$80,000 − $20,000 = $60,000

Ending RE becomes:

$360,000

What Causes Retained Earnings to Decrease?

Several events may reduce retained earnings.

Net Losses

Losses reduce cumulative earnings.

Cash Dividends

Declared cash dividends reduce retained earnings because part of accumulated earnings is distributed to shareholders.

Stock Dividends

A stock dividend can also transfer an amount from retained earnings into contributed-capital accounts. Total equity does not necessarily decline because this is generally a reclassification within equity rather than a cash distribution.

Certain Accounting Adjustments

Applicable prior-period adjustments or accounting corrections may sometimes affect previously reported retained earnings.

Do Business Loans Increase Retained Earnings?

No.

If a company borrows $100,000:

Cash increases by $100,000.

Loan payable also increases by $100,000.

The borrowed money is not revenue or net income, so borrowing itself does not increase retained earnings.

This distinction matters because having more money available does not necessarily mean the company has earned more profit.

Do Owner Investments Increase Retained Earnings?

Generally, no.

If shareholders invest additional capital, the investment typically increases contributed capital accounts such as common stock and/or additional paid-in capital.

It is not business profit.

Therefore:

Investment by shareholders ≠ Retained earnings

Retained earnings fundamentally relate to accumulated earnings retained by the company.

Can You Calculate Dividends From Retained Earnings?

Yes, if the other variables are known.

Start with:

Ending RE = Beginning RE + Net Income − Dividends

Rearrange the formula:

Dividends = Beginning RE + Net Income − Ending RE

Example:

Beginning retained earnings = $400,000
Net income = $150,000
Ending retained earnings = $510,000

Then:

$400,000 + $150,000 − $510,000 = $40,000

Dividends equal:

$40,000

This reverse calculation can be useful when analyzing financial statements, provided no other retained-earnings adjustments affect the period.

Can You Calculate Net Income From Retained Earnings?

Yes, if beginning retained earnings, ending retained earnings, and dividends are known.

Starting formula:

Ending RE = Beginning RE + Net Income − Dividends

Rearrange:

Net Income = Ending RE − Beginning RE + Dividends

Suppose:

Beginning RE = $600,000
Ending RE = $720,000
Dividends = $30,000

Then:

$720,000 − $600,000 + $30,000 = $150,000

Net income equals:

$150,000

Again, this simplified calculation assumes there were no other adjustments affecting retained earnings.

What Are Negative Retained Earnings?

Retained earnings can fall below zero.

When cumulative losses exceed accumulated profits retained by a company, the business may report negative retained earnings, often described as an accumulated deficit.

Consider:

Beginning retained earnings = $40,000
Net loss = $90,000
Dividends = $0

Calculation:

$40,000 − $90,000 = −$50,000

Ending retained earnings:

−$50,000

Negative retained earnings do not automatically mean a business is insolvent.

A growing startup, for example, may accumulate losses while investing heavily in product development and customer acquisition. But persistent accumulated deficits can still warrant closer analysis of profitability, cash flow, liquidity, debt, and overall financial condition.

Are High Retained Earnings Always Good?

Not necessarily.

A large retained earnings balance can indicate that a company has generated substantial cumulative profits.

However, retained earnings alone do not tell you whether those profits were invested effectively.

Two companies could each retain $10 million.

One might invest that money in projects that generate strong returns.

The other might invest in unsuccessful acquisitions or underperforming assets.

Financial analysis should therefore consider retained earnings alongside:

• Revenue growth
• Profitability
• Return on equity
• Cash flow
• Debt levels
• Capital expenditures
• Dividend policy
• Business growth

The retained earnings number tells you how much cumulative profit has remained in equity, not whether every dollar was used efficiently.

Retained Earnings for Multi-Location Businesses

Calculating retained earnings becomes more operationally challenging when a business has many locations, entities, or accounting systems.

Imagine a franchise network operating 100 stores.

Net income may depend on financial data originating from:

• POS systems
• Payroll applications
• Payment processors
• Ecommerce platforms
• Inventory systems
• CRM platforms
• QuickBooks companies
• ERP systems

If sales, fees, refunds, payroll costs, or other expenses are missing or incorrectly mapped, net income may be wrong.

Because net income flows into retained earnings, the retained earnings balance can also become wrong.

The formula may be simple:

Beginning RE + Net Income − Dividends

But accurate calculation depends on the accuracy of the underlying financial data.

How Accounting Integration Supports Accurate Retained Earnings

This is where accounting system integration becomes relevant.

Many companies do not generate all financial data inside a single accounting application.

Sales may originate in a POS system.

Payroll comes from a payroll platform.

Customer transactions may originate in a CRM.

Ecommerce platforms may supply orders, refunds, fees, and payouts.

Those records ultimately need to reach the accounting environment correctly for financial statements and therefore retained earnings to be reliable.

Autymate connects systems including accounting applications, POS platforms, payroll tools, CRM systems, reporting tools, databases, and APIs so data can move through connected workflows rather than depending entirely on manual transfers.

Autymate's documented use cases include moving POS sales, payments, fees, discounts, deposits and location-level activity into QuickBooks, bringing payroll data into financial reporting, consolidating multi-location information, and connecting CRM data with accounting systems.

For finance teams, the connection is straightforward:

Operational Data → Accounting Records → Net Income → Retained Earnings

If the first stages are incomplete or inaccurate, later financial reports can be affected as well.

Common Retained Earnings Calculation Mistakes

1. Using Revenue Instead of Net Income

Wrong:

Beginning RE + Revenue − Dividends

Correct:

Beginning RE + Net Income − Dividends

Revenue has not yet accounted for business expenses.

2. Treating Retained Earnings as Cash

A $500,000 retained earnings balance does not mean the company has $500,000 in a bank account.

Always look at cash separately.

3. Forgetting Net Losses

If the company loses money, that loss should reduce retained earnings.

4. Ignoring Dividends

Dividends reduce the amount of earnings retained within the company.

5. Using the Wrong Beginning Balance

The beginning retained earnings balance normally comes from the previous period's ending balance.

Using an earlier or unrelated reporting period produces an incorrect result.

6. Confusing Dividends With Expenses

Dividends are generally distributions of equity, not operating expenses on the income statement.

Subtracting them when calculating net income and then subtracting them again in retained earnings would effectively double-count their impact.

7. Ignoring Accounting Adjustments

A simple calculation may not reconcile if prior-period adjustments, stock dividends, or other equity transactions affected retained earnings.

If the basic formula does not tie to the financial statements, investigate the statement of shareholders' equity rather than assuming the calculation is wrong.

Retained Earnings Calculation Checklist

Before finalizing your number, verify:

• You used the correct reporting period.
• Beginning retained earnings agree with the prior period.
• Net income agrees with the income statement.
• Net losses are treated as reductions.
• Dividends are included correctly.
• Relevant accounting adjustments were considered.
• Ending retained earnings reconcile to the balance sheet.
• The underlying accounting data is complete.
• Multi-location or multi-entity balances are consolidated consistently.

The arithmetic is easy.

The quality of the underlying accounting records is what determines whether the answer is reliable.

Frequently Asked Questions About Retained Earnings

How do you calculate retained earnings?

Use:

Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends

If the business reports a net loss, subtract the loss instead of adding net income.

What is an example of retained earnings?

Suppose a company has $100,000 in beginning retained earnings, earns $40,000, and declares $10,000 in dividends.

$100,000 + $40,000 − $10,000 = $130,000

Ending retained earnings are $130,000.

Where are retained earnings on the balance sheet?

Retained earnings are normally reported within shareholders' equity or stockholders' equity.

Are retained earnings the same as net income?

No.

Net income represents profit for one reporting period. Retained earnings represent cumulative profits retained over multiple periods after dividends and applicable adjustments.

Are retained earnings the same as cash?

No.

Retained earnings are an equity account. Cash is an asset.

A company's accumulated earnings may already have been invested in inventory, equipment, working capital, debt reduction, or other assets.

Can retained earnings be negative?

Yes. If cumulative losses exceed accumulated retained profits, the company can report negative retained earnings, commonly referred to as an accumulated deficit.

Do dividends reduce retained earnings?

Yes. Dividends distributed from accumulated earnings reduce retained earnings. For cash dividends, the accounting reduction generally occurs when the dividend is declared.

Do stock dividends affect retained earnings?

Yes. A stock dividend can transfer an amount from retained earnings to contributed-capital accounts. Unlike a cash dividend, this is generally a reclassification within shareholders' equity and does not itself require a cash outflow.

Does a loan increase retained earnings?

No. Borrowing increases cash and liabilities but does not create net income.

Does revenue increase retained earnings?

Revenue can contribute indirectly by increasing net income, but revenue is not added directly to retained earnings.

Expenses must first be deducted to determine net income.

What happens to retained earnings at the end of the year?

The ending retained earnings balance normally carries forward to become the next period's beginning retained earnings balance.

Unlike temporary revenue and expense accounts, retained earnings is an ongoing equity account.

What is the formula if no dividends are paid?

If dividends are zero:

Ending Retained Earnings = Beginning Retained Earnings + Net Income

If the company reports a loss:

Ending Retained Earnings = Beginning Retained Earnings − Net Loss

Final Thoughts

So, how do you calculate retained earnings?

Start with the amount accumulated from previous periods, add the current period's profit or subtract its loss—and deduct dividends:

Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends

For example:

$250,000 + $120,000 − $30,000 = $340,000

The calculation itself takes seconds.

The more important challenge is ensuring that the numbers feeding the calculation are accurate. Net income depends on properly recorded revenue, COGS, payroll, operating expenses, fees, refunds, and other transactions.

For businesses using multiple POS, payroll, CRM, ERP, ecommerce, and accounting systems, that makes connected financial data increasingly important.

Autymate helps businesses connect those systems and automate data movement so accounting teams can work from more consistent information instead of repeatedly exporting, importing, and reconciling disconnected data. Autymate_Custom_Integration_Ser…

A reliable retained earnings calculation therefore starts with a simple formula—but ultimately depends on reliable financial data behind it.