1. What is Retained Earnings?

Retained earnings represent the cumulative amount of net income that a company has kept (retained) rather than distributed to shareholders as dividends. It's an important component of shareholders' equity on the balance sheet.

2. How Does the Calculator Work?

The calculator uses the retained earnings formula:

Where:

• \( RE \) — Retained Earnings
• \( \text{Beginning RE} \) — Retained Earnings at the start of the period
• \( \text{Net Income} \) — Company's profit during the period
• \( \text{Dividends} \) — Amount distributed to shareholders

Explanation: The formula shows how retained earnings change over an accounting period based on profits and distributions to shareholders.

3. Importance of Retained Earnings

Details: Retained earnings are crucial for business growth as they represent funds that can be reinvested in the company. They're also an indicator of a company's financial health and its ability to fund expansion without external financing.

4. Using the Calculator

Tips: Enter all values in dollars. Beginning retained earnings should be from your previous balance sheet. Net income can be positive or negative (for losses). Dividends should be the total amount paid out to shareholders during the period.

5. Frequently Asked Questions (FAQ)

Q1: Can retained earnings be negative?
A: Yes, negative retained earnings (accumulated deficit) occur when cumulative losses and dividends exceed cumulative profits.

Q2: How often should I calculate retained earnings?
A: Typically calculated at the end of each accounting period (monthly, quarterly, or annually).

Q3: What's the difference between retained earnings and net income?
A: Net income is profit for a single period, while retained earnings are cumulative over the company's lifetime minus dividends.

Q4: Where do retained earnings appear on financial statements?
A: They appear in the shareholders' equity section of the balance sheet and are also shown in the statement of retained earnings.

Q5: Can a company pay dividends if it has negative retained earnings?
A: Generally no, as dividends are typically paid from retained earnings. However, some exceptions may exist depending on jurisdiction and company bylaws.