Ending retained earnings equals beginning retained earnings plus net income minus dividends. Retained earnings is the running total of profit a company has kept in the business instead of paying out to its owners, and the formula rolls that total forward one period at a time. You need it whenever a problem hands you last period's balance sheet and this period's income statement and asks for the new equity section.
The calculation is called a roll-forward because nothing resets between periods: this year's ending balance becomes next year's beginning balance. A company in its thirtieth year is still carrying every profit, loss, and dividend from years one through twenty-nine inside this single line.
Ending retained earnings = Beginning retained earnings + Net income (or − Net loss) − Dividends declared
Beginning retained earnings — The ending retained earnings from the prior period's balance sheet
Net income (or net loss) — The bottom line of the current period's income statement; a loss enters as a subtraction
Dividends declared — Distributions to shareholders declared during the period; not an expense, so never part of net income
Ending retained earnings — The balance reported in stockholders' equity; becomes next period's beginning balance
Beginning retained earnings is simply last period's ending balance. On an exam it is given to you — look for "retained earnings" in the stockholders' equity section of the prior balance sheet, or the opening line of the statement of retained earnings. For a brand-new company, it is zero.
Net income (or net loss) comes from the current period's income statement. It is the bottom line after every expense and tax, not revenue and not gross profit. If the company lost money, the same line works — you subtract the loss instead of adding income. This is the only place the income statement touches the balance sheet, which is why the roll-forward is the bridge between the two statements.
Dividends declared are the profits the board chose to hand back to shareholders instead of keeping. They reduce retained earnings directly, the moment they are declared — they never appear on the income statement, because paying owners is a distribution of profit, not a cost of earning it. Watch the wording in problems: dividends declared reduce retained earnings in the period of declaration, even if the cash goes out later.
Retained earnings is a claim, not a thing. It sits on the right side of the accounting equation, in equity, which means it measures how much of the company's assets the owners are entitled to because of accumulated profits. It does not say which assets. The cash those profits generated may have been spent on equipment, inventory, or paying down a loan years ago.
So retained earnings is not cash. A balance of $139,950 does not mean $139,950 is sitting in a bank account — a company can report large retained earnings and be nearly out of cash, or hold plenty of cash with a small retained earnings balance. Cash is an asset on the left side; retained earnings is a claim on the right.
The accumulated-profits logic is worth internalizing: every dollar of net income the company has ever earned did exactly one of two things. It left as a dividend, or it is still inside retained earnings. That is the entire life story of the account.
When cumulative losses and dividends exceed cumulative profits, retained earnings goes negative. A negative balance is called an accumulated deficit, and it is common in startups and young companies that spend years losing money before turning profitable. It is a signal about the past, not an automatic verdict on the future — but it does mean the company has not yet earned back what it has lost and distributed.
| Line | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Beginning retained earnings | $84,200 | $127,950 | $104,550 |
| Add: net income (subtract: net loss) | $61,750 | $(23,400) | $47,900 |
| Less: dividends declared | $(18,000) | $0 | $(12,500) |
| Ending retained earnings | $127,950 | $104,550 | $139,950 |
Walk the arithmetic. Year 1: $84,200 + $61,750 − $18,000 = $127,950. Year 2: $127,950 − $23,400 − $0 = $104,550 — the balance falls because the company lost money, and notice the board skipped the dividend, which is typical in a loss year. Year 3: $104,550 + $47,900 − $12,500 = $139,950. The two checks that catch almost every error: each ending balance must equal the next beginning balance exactly, and a loss year must move the balance down, not up.
Retained earnings shows up in two places. On the balance sheet, it is a single line in the stockholders' equity section, usually just below contributed capital (common stock and additional paid-in capital). That one number is the ending balance from the formula.
The statement of retained earnings (often folded into the statement of stockholders' equity) is the formula written out as a financial statement: it opens with the beginning balance, adds net income or subtracts the loss, subtracts dividends, and lands on the ending balance that ties to the balance sheet. If an exam asks you to "prepare" this statement, it is asking you to show the roll-forward.
In the ledger, the balance only updates at period end, when the revenue and expense accounts are zeroed out into retained earnings. That mechanical step is covered in closing entries — the roll-forward here is what those entries accomplish, seen from the statement side.
Treating retained earnings as cash. This is the classic. Retained earnings measures accumulated profit kept in the business; cash measures what is in the bank. They move for different reasons and almost never match. If a problem asks how much cash a company can distribute, retained earnings alone cannot answer it.
Putting dividends on the income statement. Dividends are not an expense, so they never reduce net income. If you subtract dividends while computing net income and then subtract them again in the roll-forward, you have double-counted. Dividends touch exactly one statement in this formula: they come out of retained earnings directly.
Mishandling a net loss. When the income statement shows a loss, it subtracts in the roll-forward — and dividends, if any were still declared, subtract on top of that. Students sometimes add the loss back or assume a loss year means dividends must be zero. A company with a large existing balance can lose money and still declare a dividend; retained earnings just falls by both amounts.
Retained earnings is a running total, not a cash balance. Each period: start with the prior ending balance, add net income or subtract the net loss, subtract dividends declared, and carry the result forward as next period's beginning balance.
Take the prior period's ending retained earnings, add the current period's net income (or subtract a net loss), and subtract dividends declared during the period. The result is ending retained earnings, which appears in the equity section of the balance sheet and becomes the next period's beginning balance.
No. Retained earnings is part of stockholders' equity — a claim on the company's assets, not an asset itself. It represents accumulated profits kept in the business; the assets those profits bought (cash, equipment, inventory) sit on the other side of the balance sheet.
Retained earnings normally carries a credit balance, like all equity accounts. Net income increases it with a credit; net losses and dividends decrease it with debits. If accumulated losses push the account to a debit balance, it is reported as an accumulated deficit.
Look in the stockholders' equity section, below contributed capital lines such as common stock and additional paid-in capital. The line is usually labeled "retained earnings" or, if negative, "accumulated deficit." That figure is the ending balance from the roll-forward.
It means cumulative losses plus cumulative dividends have exceeded cumulative profits since the company began. This is reported as an accumulated deficit and is common in startups that lose money for several years. It describes the past record, not necessarily current performance.
No. Net income is one period's profit from the income statement. Retained earnings is the running total of every period's net income and loss, minus every dividend ever declared. Net income is an input to retained earnings, added once per period through the roll-forward.
By the FinanceBrain Team · Last verified July 11, 2026 · How we produce and verify articles