1. What Are Retained Earnings?

Retained earnings represent the cumulative net earnings of a company that are retained (not distributed as dividends) since its inception. They appear on the balance sheet under shareholders' equity and are used for reinvestment in the business.

2. How the Calculation Works

The calculator uses the retained earnings formula:

Where:

• Beginning RE — Retained earnings balance at start of period
• Net Income — Company's profit during the period
• Dividends — Cash or stock dividends paid 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 indicate a company's ability to generate profits and reinvest in growth. They are crucial for funding expansion, R&D, debt reduction, and other strategic initiatives without needing external financing.

4. Using the Calculator

Tips: Enter all values in dollars. Beginning RE is the balance from the prior period's 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 are retained earnings different from revenue?
A: Revenue is total income from sales, while retained earnings are cumulative profits kept after paying expenses and dividends.

Q3: What's a good retained earnings balance?
A: It varies by industry and growth stage. Growing companies typically retain more earnings, while mature companies may distribute more as dividends.

Q4: Where do retained earnings appear on financial statements?
A: On the balance sheet under shareholders' equity, and changes appear in the statement of retained earnings.

Q5: Can you pay dividends from negative retained earnings?
A: Generally no, as dividends are typically paid from accumulated profits. Some exceptions exist with legal capital rules.