Retained Earnings: Definition, Formula & Example

Understand

Retained Earnings (RE) are the portion of a company’s earnings which is not paid as the dividend rather retained and reinvested in the company to growth. The formula for the retained earnings is mentioned below:

Retained Earnings (RE) = Opening Retained Earning + Net Income – Dividend

Example

Suppose, company X has post interest and tax earnings of $ 250,000, it has paid $150,000 as the dividend from its net income. If last year retained earnings were $420,000, calculate the amount of current year retained earnings.

Solution

Retained Earnings (RE) = 420,000 + 250,000 – 150,000 = $520,000

The amount of retained earnings is shown in the equity portion of the balance sheet with separate line item whereas negative amount is reported as deficient. The reasons behind the negative balance of retained earning might be that either the company has paid the major portion of earnings as the dividend or due to the incurrence of large losses.

Owner’s Equity vs.Retained Earnings (RE)

Owner’s equity represents owner’s investment in business after excluding dividend payments and including retained earnings during the year. For example, ABC Company has a total investment of $100 which includes $30 as long-term liabilities, during the year $25 is earning of which $10 is withdrawn or paid as dividend.

Retained Earnings (RE) = 25 – 10 = $15

Net investment from owners = 100 – 30 = $70

Owner’s Equity = 70 + 15 = $85

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