Retained earnings is defined as company income that isn't passed along to the owners or shareholders of the company. A company might retain earnings to save up for future expansion or just to have cash on hand in case an unexpected expense arises. To calculate a company's retained earnings balance after a given period, you need to know the company's prior retained earnings balance, revenue, cost of goods sold, operating expenses, taxes and dividends paid by the company.
Calculate the net profit for the year by subtracting the cost of goods sold, taxes and expenses from the total revenues. For example, if a company brought in $500,000 and had $160,000 in cost of goods sold, $160,000 in expenses and $30,000 in taxes, subtract $350,000, the sum of the costs, from $500,000 to find a profit of $150,000.
Subtract dividends paid by the company, if any, from the profits to find the change in retained earnings. For this example, if the company paid out $50,000 in dividends, subtract $50,000 from $150,000 to get $100,000.
Look up the company's retained earnings balance from the prior year in the annual report. If the company just started, the company has no retained earnings from the prior year.
Add the change in retained earnings to the company's previous retained earnings to find the new retained earnings balance. Completing this example, if the company had $35,000 in retained earnings in the previous year, add $35,000 to $100,000 to get a retained earnings balance of $135,000.
- Austin Community College: Statement of Retained Earnings
- Macrotrends. "Apple -- 40 Year Stock History, AAPL." Accessed Sept. 2, 2020.
- Apple. "Dividend History." Accessed July 31, 2020.
- Macrotrends. "Walmart -- 48 Year Stock Price History -- WMT." Accessed Sept. 2, 2020.
- Apple. "Q3F2018 Condensed Consolidated Statements of Operations," Page 2. Accessed July 31, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."