Retained earnings:

Retained earnings refer to the percentage of net earnings not paid out as
dividends, but retained by the company to be reinvested in its core business, or to
pay debt. It is recorded under owner's equity on the balance sheet. It typically has
a credit balance.
What are Retained Earnings?
Retained Earnings (RE) are the portion of a business’s profits that are not
distributed as dividends to shareholders but instead are reserved for
reinvestment back into the business. Normally, these funds are used
for working capital and fixed asset purchases (capital expenditures) or allotted
for paying off debt obligations.

business’s profits is Net income which is the amount of accounting profit a

company has left over after paying off all its expenses. Net income is found by
taking sales revenue and subtracting COGS, SG&A, depreciation, and
amortization, interest expense, taxes and any other expenses.
Retained Earnings are reported on the balance sheet under the shareholder’s
equity section at the end of each accounting period. To calculate RE, the
beginning RE balance is added to the net income or loss and then dividend
payouts are subtracted. A summary report called a statement of retained
earnings is also maintained, outlining the changes in RE for a specific period.

The Purpose of Retained Earnings

Retained earnings represent a useful link between the income statement and
the balance sheet, as they are recorded under shareholders’ equity which
connects the two statements. The purpose of retaining these earnings can be
varied and includes buying new equipment and machines, spending
on research and development, or other activities that could potentially
generate growth for the company. This reinvestment into the company aims
to achieve even more earnings in the future.

If a company does not believe it can earn a sufficient return on

investment from those retained earnings (i.e., earn more than their cost of
capital) then they will often distribute those earnings to shareholders as
dividends or share buybacks.

What is the Retained Earnings Formula?

The RE formula is as follows:

RE = Beginning Period RE + Net Income/Loss – Cash Dividends – Stock

Dividends

Where RE = Retained Earnings

Beginning of Period Retained Earnings
At the end of each accounting period, retained earnings are reported on the
balance sheet as the accumulated income from the prior year (including the
current year’s income), minus dividends paid to shareholders. In the
next accounting cycle, the RE ending balance from the previous accounting
period will now become the retained earnings beginning balance.

The RE balance may not always be a positive number as it may reflect that the
current period’s net loss is greater than that of the RE beginning balance.
Alternatively, a large distribution of dividends that exceed the retained
earnings balance can cause it to go negative.

How Net Income Impacts Retained Earnings

Any changes or movement with net income will directly impact the RE balance.
Factors such as an increase or decrease in net income and incurrence of net
loss will pave the way to either business profitability or deficit. The Retained
Earnings account can be negative due to large, cumulative net
losses. Naturally, the same items that effect net income effect RE.
Examples of these items include sales revenue, cost of goods
sold, depreciation, and other operating expenses. Non-cash items such as
write-downs or impairments and stock-based compensation also affect the
account.

Image: CFI’s Financial Modeling Course.

How Dividends Impact Retained Earnings

Distribution of dividends to shareholders can be in the form of cash or stock.

Both forms can reduce the value of RE for the business. Cash dividends
represent a cash outflow and are recorded as reductions in the cash account.
These reduce the size of a company’s balance sheet and asset value as the
company no longer owns part of its liquid assets. Stock dividends, however,
do not require a cash outflow. Instead, they reallocate a portion of the RE to
common stock and additional paid-in capital accounts. This allocation does
not impact the overall size of the company’s balance sheet, but it does
decrease the value of stocks per share.

Learn more: how to forecast a company’s balance sheet.

End of Period Retained Earnings

At the end of the period, you can calculate your final Retained Earnings
balance for the balance sheet by taking the beginning period, adding any net
income or net loss, and subtracting any dividends.

Example Calculation
In this example, the amount of dividends paid by XYZ is unknown to us, so using
the information from the Balance Sheet and the Income Statement, we can
derive it remembering the formula Beginning RE – Ending RE + Net income
(-loss) = Dividends
We already know:

Beginning RE: $77,232

Ending RE: $78,732

Net Income: $5,297

So, $77,232 – $78,732 + $5,297= $3,797

Dividends paid = $3,797

We can confirm this is correct by applying the formula of Beginning RE + Net
income (loss) – dividends = Ending RE

We have then $77,232 + $5,297 – $3,797 = $78,732, which is in fact our

figure for Ending Retained Earnings

Retained Earnings
REVIEWED BY WILL KENTON

What Is Retained Earnings?

Retained earnings (RE) is the amount of net income left over for the business after
it has paid out dividends to its shareholders. A business generates earnings that can
be positive (profits) or negative (losses).

Positive profits give a lot of room to the business owner(s) or the company
management to utilize the surplus money earned. Often this profit is paid out to
shareholders, but it can also be re-invested back into the company for growth
purposes. The money not paid to shareholders counts as retained earnings.

Retained Earnings Formula and Calculation

\begin{aligned} &\text{RE} = \text{BP} + \text{Net Income (or Loss)}
- \text{C} - \text{S} \\ &\textbf{where:}\\ &\text{BP} =
\text{Beginning Period RE} \\ &\text{C} = \text{Cash dividends} \\
&\text{S} = \text{Stock dividends} \\ \end{aligned}
RE=BP+Net Income (or Loss)−C−Swhere:BP=Beginning Period REC=
Cash dividendsS=Stock dividends
What Retained Earnings Tells You
Whenever a company generates surplus income, a portion of the long-term
shareholders may expect some regular income in the form of dividends as a reward
for putting their money in the company. Traders who look for short-term gains
may also prefer getting dividend payments that offer instant gains.
Dividends are also preferred as many jurisdictions allow dividends as tax-free
income, while gains on stocks are subject to taxes. On the other hand, company
management may believe that they can better utilize the money if it is retained
within the company. Similarly, there may be shareholders who trust the
management potential and may prefer allowing them to retain the earnings in
hopes of much higher returns (even with the taxes).

KEY TAKEAWAYS

 Retained earnings (RE) is the amount of net income left over for the business after it has
paid out dividends to its shareholders.
 The decision to retain the earnings or to distribute it among the shareholders is usually
left to the company management.
 A growth-focused company may not pay dividends at all or pay very small amounts, as it
may prefer to use the retained earnings to finance expansion activities.

Using Retained Earnings

The following options broadly cover all possibilities on how the surplus money can
be utilized:

 The income money can be distributed (fully or partially) among the business owners
(shareholders) in the form of dividends.
 It can be invested to expand the existing business operations, like increasing the
production capacity of the existing products or hiring more sales representatives.
 It can be invested to launch a new product/variant, like a refrigerator maker foraying
into producing air conditioners, or a chocolate cookie manufacturer launching orange-
or pineapple-flavored variants.
 The money can be utilized for any possible merger, acquisition, or partnership that leads
to improved business prospects.
 It can also be used for share buybacks.
 The earnings can be used to repay any outstanding loan (debt) the business may have.

The first option leads to the earnings money going out of the books and accounts of
the business forever because dividend payments are irreversible. However, all the
other options retain the earnings money for use within the business, and such
investments and funding activities constitute the retained earnings (RE).

By definition, retained earnings are the cumulative net earnings or profits of a

company after accounting for dividend payments. It is also called earnings surplus
and represents the reserve money, which is available to the company management
for reinvesting back into the business. When expressed as a percentage of total
earnings, it is also called retention ratio and is equal to (1 - dividend payout ratio).
While the last option of debt repayment also leads to the money going out, it still
has an impact on the business accounts, like saving future interest payments, which
qualifies it for inclusion in retained earnings.

Management and Retained Earnings

The decision to retain the earnings or to distribute it among the shareholders is
usually left to the company management. However, it can be challenged by the
shareholders through majority vote as they are the real owners of the company.

Management and shareholders may like the company to retain the earnings for
several different reasons. Being better informed about the market and the
company’s business, the management may have a high growth project in view,
which they may perceive as a candidate to generate substantial returns in the
future. In the long run, such initiatives may lead to better returns for the company
shareholders instead of that gained from dividend payouts. Paying off high-interest
debt is also preferred by both management and shareholders, instead of dividend
payments.

Most often, a balanced approach is taken by the company's management. It

involves paying out a nominal amount of dividend and retaining a good portion of
the earnings, which offers a win-win.

Dividends and Retained Earnings

Dividends can be distributed in the form of cash or stock. Both forms of
distribution reduce retained earnings. Cash payment of dividend leads to cash
outflow and is recorded in the books and accounts as net reductions. As the
company loses ownership of its liquid assets in the form of cash dividends, it
reduces the company’s asset value in the balance sheet thereby impacting RE.

On the other hand, though stock dividend does not lead to a cash outflow, the stock
payment transfers a part of retained earnings to common stock. For instance, if a
company pays one share as a dividend for each share held by the investors, the
price per share will reduce to half because the number of shares will essentially
double. Since the company has not created any real value simply by announcing a
stock dividend, the per-share market price gets adjusted in accordance with the
proportion of the stock dividend.

While the increase in the number of shares may not impact the company’s balance
sheet because the market price automatically gets adjusted, it decreases the per
share valuation, which gets reflected in capital accounts thereby impacting the RE.
A growth-focused company may not pay dividends at all or pay very small
amounts, as it may prefer to use the retained earnings to finance activities like
research and development, marketing, working capital requirements, capital
expenditures and acquisitions in order to achieve additional growth. Such
companies have high RE over the years. A maturing company may not have many
options or high return projects to use the surplus cash, and it may prefer handing
out dividends. Such companies have low RE.

Retained Earnings vs. Revenue

Both revenue and retained earnings are important in evaluating a company's
financial health, but they highlight different aspects of the financial
picture. Revenue sits at the top of the income statement and is often referred to as
the top-line number when describing a company's financial performance. Since
revenue is the total income earned by a company, it is the income
generated before operating expenses, and overhead costs are deducted. In some
industries, revenue is called gross sales since the gross figure is before any
deductions.

Retained earnings are the portion of a company's profit that is held or retained and
saved for future use. Retained earnings could be used for funding an expansion or
paying dividends to shareholders at a later date. Retained earnings are related to
net (as opposed to gross) income since it's the net income amount saved by a
company over time.

Limitations of Retained Earnings

As an analyst, the absolute figure of retained earnings during a particular quarter or
year may not provide any meaningful insight, and its observation over a period of
time (like over five years) may only indicate the trend about how much money a
company is retaining. As an investor, one would like to infer much more — such
as how much returns the retained earnings have generated and if they were better
than any alternative investments.

Retained Earning to Market Value

A way to assess how successful the company was in utilizing the retained money is
to look at a key factor called “Retained Earnings To Market Value.” It is calculated
over a period of time (usually a couple of years) and assesses the change in stock
price against the net earnings retained by the company.

For example, during the five-year period between September 2013 and September
2017, Apple stock price rose from $95.30 to $154.12 per share. During the same
five-year period, the total earnings per share were $38.87, while the total dividend
paid out by the company was $10 per share. These figures are arrived at by
summing up earnings per share and dividend per share for each of the five years.
These figures are available under the “Key Ratio” section of the company’s
reports.

As available on the MorningStar portal, Apple had the following EPS and dividend
figures over the given time frame, and summing them up gives the above values
for total EPS and total dividend:

The difference between total EPS and total dividend gives the net earnings retained
by the company: $38.87 - $10 = $28.87. That is, over the five-year period, the
company retained a total of $28.87 earnings per share. Over the same duration, its
stock price rose by ($154.12 - $95.30 = $58.82) per share. Dividing this price rise
per share by net earnings retained per share gives a factor of ($58.82 / $28.87 =
2.037), which indicates that for each dollar of retained earnings, the company
managed to create $2.037 worth of market value.

If the company had not retained this money and instead taken an interest-
bearing loan, the value generated would have been less owing to the outgoing
interest payment. RE offers free capital to finance projects allowing for efficient
value creation by profitable companies.

A look at similar calculation for another stock, Walmart Inc. (WMT), indicates that
over the five-year period between January 2013 and January 2018, the firm's stock
price rose from $69.95 to $106.6, and net earnings retained were $12.36 per share.
The change in market value with respect to retained earnings comes to ($106.6 -
$69.95) / $12.36 = 2.965, which indicates that Walmart generated almost triple the
market value for each dollar of retained earnings.

Value Created
However, readers should note that the above calculations are indicative of the
value created with respect to the use of retained earnings only, and it does not
indicate the overall value created by the company. It is possible that in totality the
Apple stock may have generated more returns than the Walmart stock during the
period of study because Apple may have additionally made separate (non-RE)
large-size investments resulting in more profits overall. On the other hand,
Walmart may have a higher figure for retained earnings to market value factor, but
it may have struggled overall leading to comparatively lower overall returns.

Example of Retained Earnings

Companies publicly record retained earnings under shareholders' equity on
the balance sheet. The figure has now become a standard and is reported as a
separate line item in the company’s balance sheet. For instance, Apple Inc.’s
(AAPL) recent balance sheet shows that the company had retained earnings of
$79.436 billion, as of June 2018 quarter:

Similarly, the iPhone maker, whose fiscal year ends in September, had $98.33
billion as retained earnings as of September 2017:

The retained earnings are calculated by adding net income to (or subtracting net
losses from) the previous term’s retained earnings and then subtracting any net
dividend(s) paid to the shareholders.

The figure is calculated at the end of each accounting period (quarterly/annually.)

As the formula suggests, retained earnings are dependent on the corresponding
figure of the previous term. The resultant number may either be positive or
negative, depending upon the net income or loss generated by the company.

Alternatively, the company paying large dividends whose nets exceed the other figures can also
lead to retained earnings going negative. Any item that impacts net income (or net loss) will
impact the retained earnings. Such items include sales revenue, cost of goods sold (COGS),
depreciation, and necessary operating expenses

How Is Retained Earnings Different From

Revenue?
Revenue is the value of all sales of goods and services recognized by a company in a period.
Revenue (also revered to as Sales, Turnover, or Income) forms the beginning of a
company’s Income Statement and often considered the “Top Line” of a business. Expenses are
deducted from a company’s revenue to arrive at its Profit or Net Income.
Retained Earnings (RE) are the portion of a business’s profits that are not distributed as
dividends to shareholders but instead, are reserved for reinvestment back into the business.
Normally, these funds are used for working capital and fixed asset purchases (capital
expenditures) or allotted for paying off debt obligations.

Updated Aug 10, 2018

Revenue is the total income earned from the sale of goods and services, while
retained earnings is the amount of net income retained by a company. Both
revenue and retained earnings are important in evaluating a company's financial
health, but highlight different aspects of the financial picture.

Revenue
Revenue sits at the top of the income statement and is often referred to as the
top-line number when describing a company's financial performance. Since
revenue is the total income earned by a company, it is the income
generated before operating expenses, and overhead costs are deducted. In
some industries, revenue is called gross sales since the gross figure is before
any deductions. However, net sales can be used in place of revenue since net
sales refers to revenue minus any exchanges or returns by customers. For
example, net sales is used by the retail industry.

Retained Earnings
Retained earnings is the portion of a company's profit that is held or retained
and saved for future use. Retained earnings could be used for funding an
expansion or paying dividends to shareholders at a later date. Retained earnings
is related to net income since it's the net income amount saved by a company
over time.

Net income is the profit earned for a period and is calculated by subtracting all of
the costs of doing business. Those costs can include operating expenses, such
as rent, utilities, and payroll, overhead costs or sales, general, and
administrative costs, interest on debt, and depreciation.

Net income is often called the bottom line since it sits at the bottom of the income
statement. When the net income is not paid out to shareholders or reinvested
back into the company, it becomes retained earnings. It's important to note that
retained earnings is an accumulated balance that could be the result of many
quarters or years, similar to a savings account.

Calculating Retained Earnings

Retained earnings is listed on a company's balance sheet under the

shareholders' equity section. However, it can also be calculated by taking the
beginning balance of retained earnings, adding the net income (or loss) for the
period followed by subtracting any dividends paid to shareholders.

For example, a company has the following numbers for the current period:

 A beginning retained earnings balance of $5,000 when the reporting period

began,
 Net income of $4,000 for the period,
 Dividends paid of $2,000,

Retained earnings at the end of the period is:

Retained Earnings Beginning Balance + Net Income (or loss) – Dividends

Retained Earnings = $5,000 + $4,000 - $2,000 = $7,000

Takeaways
The difference between revenue and retained earnings is that revenue is the total
amount of income made from sales while retained earnings reflects the portion of
profit a company keeps for future use.

Revenue and retained earnings are correlated to each other since a portion of
revenue, in the form of profit, may ultimately become retained earnings. The
amount of profit being held in retained earnings is particularly important
to shareholders since it provides insight into a company's ability to fund dividends
or share buybacks in the future.

The ratio between revenue and retained earnings can also illustrate how
effectively a company invests in the long-term health of the company. For
example, a company may use retained earnings to fund purchases of fixed
assets or property, plant, and equipment.

The amount of profit retained can show how well a company

manages their earnings after expenses, how efficient it is in its business
operations, whether it's holding a large amount of cash, and whether
a company is being too aggressive or too conservative with its investments or
capital expansion.

Since retained earnings is a cumulative amount of profit, it can be much larger

with older companies as compared to newer companies. One method used to
compare the retained earnings of different companies is to divide retained
earnings by the total number of the company's reported years in operation. The
result provides an average annual retained-earnings amount.
 Which Transactions Affect Retained Earnings?
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BY CHIZOBA MORAH

Updated Jul 11, 2019

Retained earnings are the portion of a company's net income that management
retains for internal operations instead of paying it to shareholders in the form of
dividends. In short, retained earnings is the cumulative total of earnings that have
yet to be paid to shareholders. These funds are also held in reserve to reinvest
back into the company through purchases of fixed assets or to pay down debt.

Retained Earnings
Retained earnings (RE) are calculated by taking the beginning balance of RE
and adding net income (or loss) and then subtracting out any dividends paid.

For example: Let's assume you had the following numbers for a particular period:

 Beginning RE of $5,000 when the reporting period started

 $4,000 in net income at the end of the period
 $2,000 in dividends paid out during the period

To calculate the retained earnings at the end of the period:

Retained Earnings = RE Beginning Balance + Net Income (or loss) – Dividends

Retained Earnings = $5,000 + $4,000 - $2,000 = $7,000

Retained Earnings & Shareholder Equity

Retained earnings are reported under the shareholder equity
section of the balance sheet while the statement of retained earnings outlines the
changes in RE during the period.

A company's shareholder equity is calculated by subtracting total liabilities from

its total assets. Shareholder equity represents the amount left over for
shareholders if a company paid off all of its liabilities. To see how retained
earnings impacts shareholders' equity, let's look at an example.

Below is the balance sheet for Bank of America Corporation (BAC) for the fiscal
year ending in 2017, from the bank's 10K statement.
Shareholder equity is located at the bottom of the balance sheet (highlighted in
blue).

 Total shareholder equity was roughly $267 billion at the end of 2017.
 Retained earnings came in at approximately $113.8 billion.
 In the upcoming quarters, any net income that's left over after paying
dividends will be added to the $113.8 billion (assuming none of the existing
retained earnings is spent during the quarter to pay debt or buy fixed
assets).
 Both increases and decreases in retained earnings affect the value of
shareholders' equity. As a result, both retained earnings and shareholders'
equity are closely watched by investors and analysts since these funds are
used to pay shareholders via dividends.

What Transactions Affect Retained Earnings

Revenue is the total amount of income generated by the sale of goods or
services related to the company's primary operations. Revenue is the income a
company generates before any expenses are taken out.

Revenue, or sometimes referred to as gross sales, affects retained earnings

since any increases in revenue through sales and investments boosts profits or
net income. As a result of higher net income, more money is allocated to retained
earnings after any money spent on debt reduction, business investment,
or dividends.

Net income will have a direct impact on retained earnings. As a result, any
factors that affect net income, causing an increase or a decrease, will also
ultimately affect RE.

Factors that can boost or reduce net income include:

 Revenue and sales

 Cost of goods sold, which is the direct costs attributable to the production
of the goods sold in a company and includes the cost of the materials used
in creating the good along with the direct labor costs involved in
production
 Operating expenses, which are the costs incurred from normal business
operations such as rent, equipment, inventory costs, marketing, payroll,
insurance, and funds allocated for research and development
 Depreciation, which is the cost of a fixed asset spread out over its useful
life
 With net income, there's a direct connection to retained earnings. However, for
other transactions, the impact on retained earnings is the result of an indirect
relationship.

Additional paid-in capital does not directly boost retained earnings but can lead to
higher RE in the long-term. Additional paid-in capital reflects the amount of equity
capital that is generated by the sale of shares of stock on the primary market that
exceeds its par value. The par value of a stock is the minimum value of each
share as determined by the company at issuance. If a share is issued with a par
value of $1 but sells for $30, the additional paid-in capital for that share is $29.

Additional paid-in capital is included in shareholder equity and can arise from
issuing either preferred stock or common stock. The amount of additional paid-in
capital is determined solely by the number of shares a company sells.

As a result, additional paid-in capital is the amount of equity available to fund

growth. And since expansion typically leads to higher profits and higher net
income in the long-term, additional paid-in capital can have a positive impact on
retained earnings, albeit an indirect impact.

The Bottom Line

Retained earnings are affected by any increases or decreases in net income and
dividends paid to shareholders. As a result, any items that drive net income
higher or push it lower will ultimately affect retained earnings.

Are Retained Earnings Listed on the Income

Statement?
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BY J.B. MAVERICK

Updated May 14, 2019

Retained earnings are the cumulative net earnings or profit of a company after
paying dividends. Retained earnings are the net earnings after dividends that are
available for reinvestment back into the company or to pay down debt. Since
they represent a company's remainder of earnings not paid out in dividends, they
are often referred to as retained surplus.
Retained earnings appear on a company's balance sheet and may also be
published as a separate financial statement. The statement of retained
earnings is one of the financial statements that publicly traded
companies are required to publish, at least, on an annual
basis. Uncommonly, retained earnings may be listed on the income statement.

The calculation of retained earnings adds net income to beginning retained

earnings for the period and subtracts dividends to be paid to shareholders. The
formula is as follows:

\begin{aligned} &\text{Retained Earnings} = RE + NI - D\\

&\textbf{where:}\\ &RE=\text{beginning retained earnings}\\
&NI=\text{net income}\\ &D=\text{dividends}\\ \end{aligned}
Retained Earnings=RE+NI−Dwhere:RE=beginning retained earningsNI=n
et incomeD=dividends
If a company has a net loss for the accounting period, a company's retained
earnings statement shows a negative balance or deficit. Alternatively, a positive
balance is a surplus or retained profit.

The statement also delineates changes in net income over a given period, which
may be as often as every three months, but not less than annually. Since the
statement of retained earnings is such a short statement, it sometimes appears
at the bottom of the income statement after net income.

Investors pay close attention to retained earnings since the account shows how
much money is available for reinvestment back in the company and how much is
available to pay dividends to shareholders.

What is Net Income?

Net income is the amount of accounting profit a company has left over after
paying off all its expenses. Net income is found by taking sales revenue and
subtracting COGS, SG&A, depreciation, and amortization, interest expense,
taxes and any other expenses.

Net income is the last line item on the income statement proper. Some
income statements, however, will have a separate section at the bottom
reconciling beginning retained earnings with ending retained earnings
through net income and dividends.

Source: Amazon SEC filing

Other names for Net Income

The bottom line of a company’s income statement has three names, which
include:

 Net Income
 Net Profit
 Net Earnings
All three of these terms mean the same thing, which can sometimes be
confusing for people who are new to finance and accounting.

In this article, we will use all three terms interchangeably.

How to Calculate Retained Earnings on a Balance

Sheet
by Michael Keenan

Retained earnings refers to money a company has earned and not used for paying expenses
or dividends. When finalizing your balance sheet, you need to know how to calculate the
company's new retained earnings. Before you do so, you need to know the retained earnings
from the previous year, the company's net income and the amount of money the company paid in
dividends. The retained earnings plus the common stock value equal the shareholders'
equity in the company.
1. Look up the retained earnings from the previous year. If the company is new, or had no
retained earnings, use "$0" as the retained earnings amount.
2. Add the company's net income for the year to the retained earnings from the previous year.
For example, if the company has $672,000 in prior year's retained earnings and had a net income
of $350,000, add $672,000 to $350,000 to get $1,022,000.
3. Subtract the dividends paid by the company to find the company's new retained earnings on
the balance sheet. Completing the example, if the company paid $200,000 in dividends, subtract
$200,000 from $1,022,000 to find the new retained earnings equal $822,000.

What Three Types of Transactions Affect Retained

Earnings?
Retained earnings are an important part of any business's financial picture. Over the course of a
year, retained earnings will increase and decrease. These fluctuations will be due primarily to
one of three events in a business's cash flow: experiencing net gains, having net losses or paying
out dividends. All these events will be documented in a business's accounting statement of
retained earnings, which acts as a helpful indicator of a business's financial health.
Net Gains
Any event that impacts a business's income will, in turn, affect retained earnings. Retained
earnings increase when a business receives income, whether through profits gained by providing
customers a service or a product or through capital stock investments. Retained earnings carry
over from the previous year if they are not exhausted and continue to be added to retained
earnings statements in the future. For the most part, businesses rely on doing good business with
their customers and clients to see retained earnings increase.
Net Losses
Events that cause a net loss in a business's cash flow will decrease retained earnings. This is
usually the result of paying the costs of doing business. Overhead expenses such as rent, payroll
and purchasing goods or supplies to provide services or products to customers are all things that
will reduce retained earnings. Anything that deducts from a business's income or cash causes a
resultant dip in retained earnings, even if the expenses are necessary to keep the business
running.
Dividend Payments
Another thing that affects retained earnings is the payout of dividends to stockholders. Dividends
are what allow stockholders to receive a return on their investment in the business through the
receipt of company assets, often cash. This cash is paid out by the company to its stockholders
on a date declared by the business's board of directors, but only if the company has sufficient
retained earnings to make the dividend payments. Dividend payments are not recorded on
income statements, and typically are only found in a retained earnings or stockholders' equity
statement; both retained earnings and equity are decreased as a result of paying dividends.
Balance Sheet
Essentially, retained earnings are what allow a business's balance sheet to ultimately balance.
They fit in neatly between the income statement and the balance sheet to tie them together. The
income statement records revenue and expenses and allows for an initial retained earnings figure.
The retained earnings statement factors in retained earnings carried over from the year before as
well as dividend payments. On the balance sheet, the business's total assets, liabilities and
stockholders' equity are visible and able to be reconciled as a result of recording retained
earnings.

What Factors Generally Cause Retained Earnings to

Increase or Decrease?
by Keela Helstrom
The Use of Retained Earnings
Factors that may cause the equity account to increase or decrease include certain transactions
related to the repurchase of company stock, the declaration of shareholder dividends and the
income or loss from operations. Shown as a separate line item on a company's balance sheet, the
portion of retained earnings that are not intended for shareholder distribution are used by
management to reinvest back into the corporation.
Treasury Stock Transactions
While reviewing the shareholders' equity section of a company's balance sheet, the investor will
notice the line item "treasury shares," shown as a negative balance. Treasury shares represent
shares of stock purchased from the company's shareholders. Stock may be repurchased to return
cash to shareholders, offer the shares to a company's employees as part of an employee benefit
program or to be retired. Certain transactions related to treasury stock may decrease retained
earnings. For example, when the treasury stocks are resold to investors below their cost, retained
earnings may be reduced to absorb the loss.
Income or Loss From Operations
Whether a company reports net income or suffers a net loss, the operating results from a
company's fiscal year is recorded to retained earnings, resulting in a increase or decrease to the
account. Growth strategies that are developed and implemented by management to boost a
corporation's revenues and reduce the cost of operations may result in an increase to retained
earnings. This may include winning new business, raising customer prices and implementing
cost-cutting strategies throughout the organization.
Declaration of Cash Dividends
When a corporation announces a dividend to its shareholders, the retained earnings account is
decreased. Since dividends are distributed on a per share basis, retained earnings is decreased by
the total of outstanding shares multiplied by the dividend rate on each share of stock. While a
board of directors may declare dividends on both common and preferred shares of stock,
dividends on preferred shares of stock receive preference in order of payment.

Difference Between Retained Earnings & Net

Income
by Neil Kokemuller

Net Income Basics

Net income is the third and final income calculation during a month or quarter. First, you
calculate gross profit, which is revenue minus cost of goods sold. Then, you add fixed costs to
get to operating income. Net income is the final result when you add any irregular revenue and
subtract any unusual expenses from operating profit. Net income is the amount of revenue that a
company retains at the end of the period.
Income Statement
A key distinction between net income and retained earnings is their location within financial
reports. Net income is displayed on the income statement where all profit and loss items are
included. An income statement is periodic, so it shows income earned for a specific period.
Typically, the top of the net income statement reads, "Statement ending March 31, 2013," or
otherwise denotes the period covered by the report. Companies have two choices with net
income; they can pay it out as dividends to owners or reinvest it in the business.
Retained Earnings Basics
Retained earnings is also called accumulated earnings because it is net income the company
retains over time. It is similar to a kid putting his allowance in a piggy bank and holding it versus
spending it for something he wants. Companies typically retain earnings for a couple of reasons.
High growth companies retain earnings to invest in new assets, product development or
marketing. More established companies often maintain a certain level of retained earnings as an
emergency fund. Thus, if they have a net loss in a period, it comes out of retained earnings.
Balance Sheet
Retained earnings appears on both the balance sheet and statement of owner's equity. The
balance sheet lays out all assets and liabilities at the end of a given period. Retained earnings is
an asset account, as it has positive value for the company. It is also shown on the owner's equity
statement along with paid-in capital, which is the value of investment shares held by company
owners. Retained earnings and paid-in capital combined equal owner's equity, or the net worth of
the company.

How to Calculate a Retained Earnings Statement

With Examples
by Bryan Keythman

1. Determine from your accounting records your net income or net loss and the amount of
dividends you paid in the current accounting period. Determine the previous period’s ending
retained earnings balance, which is the same as the current period’s beginning retained earnings
balance. For example, assume you generated $10,000 in net income, paid $1,000 in dividends
and had a $50,000 retained earnings balance at the end of the previous period.
2. Write “Beginning retained earnings” in the first column and its amount in the second column
on the first line of the statement of retained earnings. In this example, write “Beginning retained
earnings” in the first column and “$50,000” in the second.
3. Write “Plus: Net income” in the first column and the amount of net income in the second
column on the second line. Alternatively, write “Less: Net loss” in the first column and the
amount of a net loss in the second column. In this example, write “Plus: Net income” and
“$10,000.”
4. Add net income to beginning retained earnings. Alternatively, subtract a net loss from
beginning retained earnings. Write either result in the second column of the third line. In this
example, add $10,000 to $50,000 to get $60,000. Write “$60,000” in the second column of the
third line.
5. Write “Less: Dividends” in the first column and the amount of dividends in the second column
on the fourth line. In this example, write “Less: Dividends” and “$1,000.”
6. Subtract dividends from your Step 4 result to calculate the current period’s ending retained
earnings. Write “Ending retained earnings” in the first column and the amount in the second
column on the fifth line of the statement. Continuing the example, subtract $1,000 from $60,000
to get $59,000 in ending retained earnings. Write “Ending retained earnings” in the first column
and “$59,000” in the second column.