1. What is Retained Earnings?

Retained earnings represent the cumulative net income of a company that is retained (not distributed as dividends) and reinvested in the business. It's a key component of shareholders' equity on the balance sheet.

2. How Does the Calculator Work?

The calculator uses the retained earnings formula:

Where:

• Beginning Retained Earnings — The retained earnings balance at the start of the period
• Net Income — The company's profit during the period
• Dividends — Cash or stock dividends paid to shareholders during the period

Explanation: The formula shows how much of the company's profits are being reinvested in the business rather than distributed to shareholders.

3. Importance of Retained Earnings

Details: Retained earnings are crucial for business growth, as they represent funds available for reinvestment in operations, debt reduction, or future expansion. They indicate the company's historical profitability and dividend policy.

4. Using the Calculator

Tips: Enter all values in dollars. Beginning retained earnings should be from your previous balance sheet. Net income comes from the income statement, and dividends from the statement of cash flows.

5. Frequently Asked Questions (FAQ)

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

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

Q3: What's the difference between retained earnings and cash?
A: Retained earnings are an accounting concept, not necessarily cash. The company may have reinvested the earnings in assets or operations.

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

Q5: How do stock dividends affect retained earnings?
A: Stock dividends transfer value from retained earnings to common stock and additional paid-in capital accounts, but don't reduce total equity.