1. What is Retained Earnings?

Retained earnings represent the cumulative net income of a company that is retained (not distributed as dividends) since its inception. It's an important part of shareholders' equity on the balance sheet and shows how much profit has been reinvested in the business.

2. How Does the Calculator Work?

The calculator uses the retained earnings formula:

Where:

• Beginning RE — Retained earnings from the end of the previous period
• Net Income — The company's profit during the current period
• Dividends — Any dividends paid to shareholders during the period

Explanation: The formula shows how retained earnings change over an accounting period by adding current profits and subtracting any distributions to shareholders.

3. Importance of Retained Earnings

Details: Retained earnings are crucial for business growth as they represent funds available for reinvestment in the company. They're used for expanding operations, purchasing assets, paying down debt, or other strategic initiatives. Investors often examine retained earnings to assess a company's financial health and growth potential.

4. Using the Calculator

Tips: Enter all values in dollars. Beginning retained earnings should be from your previous balance sheet, net income from your income statement, and dividends declared during the period. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

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

Q2: Where do I find beginning retained earnings?
A: It's listed under shareholders' equity on the previous period's balance sheet.

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.

Q4: Do all companies have retained earnings?
A: Only corporations have retained earnings. Sole proprietorships and partnerships use different equity accounts.

Q5: How often should I calculate retained earnings?
A: Typically calculated at the end of each accounting period (monthly, quarterly, or annually).