A corporation’s retained earnings are the cumulative net earnings and profits (E&P) minus any dividend distributions to the shareholders. The formula for retained earnings is as follows:
Retained Earnings = Beginning Retained Earnings + Current Period Earnings and Profits (E&P) – Current Period Dividend Distributions
Example Calculation for First-Year Corporation
Company A wants to calculate its retained earnings balance as of December 31, 2022. Company A started business on February 1, 2022, and has the following financial figures as of December 31, 2022:
Balance Sheet on December 31, 2022
Common Stock: $1,000
Additional Paid In Capital (APIC): $25,000
Current Year Dividends: $6,000
Beginning Retained Earnings: $0
Income Statement 2/1/2022 to 12/31/2022
Net Income: $65,000
Because this is the first year of operations, Company A has no retained earnings at the beginning of the year. Company A’s retained earnings calculation as of December 31, 2022 is as follows:
$59,000 = $0 + $65,000 – $6,000
Example Calculation for Second-Year Corporation
Company B wants to calculate its retained earnings balance as of December 31, 2023. Company B started business on June 30, 2022, and has the following financial figures as of December 31, 2023:
Balance Sheet on December 31, 2023
Common Stock: $1,000
Additional Paid In Capital (APIC): $25,000
Current Year Dividends: $14,000
Retained Earnings on 1/1/2023: $17,500
Income Statement 1/1/2023 to 12/31/2023
Net Income: $125,000
Company B’s retained earnings calculation as of December 31, 2023 is as follows:
$128,500 = $17,500 + $125,000 – $14,000