How To Calculate Retained Earnings
This Video Jug clip demonstrates a simple method to discern potential financial profitability from a company's retained earnings.
Hi, my name's Grant Hobson. I've been a finance analyst for the last six years. Today I'm going to run you through some finance performance methods as well as some investment appraisal techniques.
How to calculate retained earning In most cases, companies retain their earnings in order to invest them into areas where the company can create growth opportunities such as buying machinery or spending money on research and development or improving the performance of the factory. Should they get a loss in that period which is graced in the beginning of retained earnings, then the retained earning becomes negative creating a deficit. The formula to calculated retained earnings is a quite simple one.
You take your beginning retained earnings, which is the closing from last period, you add in your net income from the new financial period and you deduct any dividends paid out to share holders. The retained earnings calculation is your beginning retained earnings which is the end of the previous period plus your net income in the new period less any dividends you've paid out in this period. So for example if we've had a retained earnings of £200,000, we then generated a net income of £60,000 in the new period but we've paid out dividends of £15,000 for our shareholders, we have a new retained earnings balance at the end of the new period of £245,000.
This will be carried forward into next year. Alternatively, it can be used for investments for the company. So to recap, the retained earnings calculation is your beginning retained earnings, which is the retained earnings at the end of the previous period, plus your new income in the new period, less any dividends you've paid out in this period.
Alternatively, it can be used for investments by the company.