How to Calculate Retained Earnings

Steps
1. 1 Understand what retained earnings is. Retained earnings is a permanent account that appears on the balance sheet under the Stockholder's Equity heading. The account balance represents the company's cumulative earnings since formation that have not been distributed to shareholders in the form of dividends. If the retained earnings account has a negative balance, it is called "accumulated deficit." Ads by Google

Financial Engineering
University of Hawaii's Intensive 1-year Master Program mfe.shidler.hawaii.edu 2. 2 Gather the necessary data from the company's financial statements. You will need the account balance for the firm's retained earnings (this will appear on the previous period's balance sheet), and you will need all the accounts that will appear on the current income statement. As an example, consider the figures presented below.
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Cool Products, Inc.

3. 3 Calculate the gross margin. Gross margin is a figure presented on a multiplestep income statement, and is determined by subtracting the costs of sales from sales. In the example above, gross margin would be (150,000 90,000) or $60,000. 4. 4 Calculate operating income. Operating income represents the company's income after all sales expenses and operating (ongoing) expenses have been paid. To calculate it, subtract operating expenses from the gross margin. In the example above, operating income would be (60,000 15,000) or $45,000.

5. 5 Calculate pre-tax net income. To do this, subtract expenses due to interest, depreciation, and amortization from the company's operating income. In the example above, pre-tax net income would be (45,000 1200 4000) or $39,800. 6. 6 Calculate after-tax net income. To do this, first apply the company's tax rate to their pre-tax net income (by multiplying them together). In the example above, taxes would be (.34 * 39,800) or $13,532. To get after-tax net income, subtract this amount from the pre-tax figure: (39,800 13,532) or $26,268. 7. 7 Subtract dividends paid. To arrive at the company's retained earnings for the current period, subtract dividends paid from the after-tax net income. In the example above, the current period's retained earnings would be (26,268 10,000) or $16,268. 8. 8 Calculate the balance of the retained earnings account. Remember, retained earnings is a cumulative account. To arrive at the overall retained earnings, add the current period's retained earnings to the account's balance as of the end of the last accounting period. In the above example, retained earnings would now have a balance of (30,000 + 16,268) or $46,268.