There are a few ways to look at retained earnings. Here is the retained earnings formula so you know how to calculate retained earnings and where to find them on your financial statements.
Retained earnings formula for a single financial period
Retained earnings for a single financial period are straightforward to calculate if you maintain financial records using a trusted bookkeeping or accounting system. With most accounting apps, you can find retained earnings on your financial reports without doing any extra math. If you’re calculating it manually, here’s the retained earnings formula for a single financial period, whether a month, quarter, or year:
Retained earnings = Net income (or Loss) – Dividends
Net income represents the business’s income or loss when subtracting all expenses from a business’s revenue. Net income is another term for profit.
Dividends are payments made to shareholders, including a solo business owner.²
Ongoing net retained earnings formula
It’s helpful to know your retained earnings for single financial periods and the business’s net retained earnings, or total retained earnings, over time. Here’s the retained earnings formula used for ongoing calculations, like what you see on a company’s balance sheet.
Retained earnings = Beginning retained earnings + Net income (or Loss) – Dividends
You’ll likely notice that this formula is identical to the calculation for one period with a single difference. In this case, you take the total retained earnings from the start of the business and update it to find the total retained earnings since the company’s founding.
Adding or subtracting the most recent retained earnings from the ongoing total gives you the updated number.
Retained earnings example
Here’s an example walking you through how to calculate retained earnings for a freelancer or other small business.
Let’s say Pat is a freelancer who earned $6,000 last month and spent $4,000 on business expenses and taxes, including their monthly payroll from the business. That gives Pat a Net income, or profit, of $2,000.
Net income = $6,000 Revenue – $4,000 Expenses
Net income = $2,000
Most months, Pat likes to take an owner dividend, which Pat uses for savings and investments. This month, Pat took a $500 payment from the business, leaving $1,500 in retained earnings.
Retained earnings = Net income – Dividends
Retained earnings = $2,000 – $500
Retained earnings = $1,500
For the month we’re analyzing, Pat’s freelance business maintained retained earnings of $1,500.
