How to Do a Retained Earnings Equation

by Mark Kennan

A company's retained earnings balance shows the amount of profit the company has retained over its years of existence without putting it back into the company or paying it out in dividends. To calculate the retained earnings balance after a given year, you need to know the prior year's retained earnings balance, the dividends paid out and either the net income or the information needed to calculate the net income. All the information should be in the company's annual report.

1. Look up the retained earnings balance from the prior year. If the company just started out, the prior retained earnings balance equals $0.

2. Add the company's net profit for the year to the prior retained earnings balance. To find the net profit, subtract the company's expenses incurred in running the business from the total revenues. For example, if a company has a previous retained earnings balance of $200,000 and has a net income of $420,000, you get $620,000.

3. Add the preferred stock dividends paid to the common stock dividends paid to find the total dividends paid by the company. For example, if the company pays $35,000 in dividends to the preferred shareholders and $85,000 in dividends to the common shareholders, add $35,000 to $85,000 to get $120,000 in total dividends.

4. Subtract the total dividends paid from the sum of the prior retained earnings balance and the net income. Finishing the example, subtract $120,000 from $620,000 to find the retained earnings balance equals $500,000.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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