Question

how to calculate retain earning?

Answer 1

Ans-  What are Retained Earnings?

Retained Earnings are portion of business's profit that are not distributed as a dividend among the shareholders but fixed assets purchases (Capital Expenditure) or alloted for paying off debt obligations.

Retained Earnings are reported on the Balance Sheet under the shareholder's equity section at the end of each accounting period. To claculate Retained Earnings (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, outline the changes in RE for a specified period.

The Purpose of Retained Earnings

Retained Earnings represent a useful link between Income Statement and Balance Sheet, as they are recorded under shareholder's equity, which connect the two statements. The Purpose of retaining these earnings can be varied and include buying new equiptment 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 into the future.

If a company does not believe it can earn a sufficient return on investment from those retained earnings (i.e, ean more than their cost of capital), then they will often distribute those earnings to shareholders as dividends or share buybacks.

What is Retained Earning Formula?

The RE formula is as follows:

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

Where RE = Retained Earnings

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