How to find and calculate retained earnings

To calculate retained earnings, add the current period’s net income to the beginning retained earnings balance, then subtract dividends or qualifying owner distributions recorded against retained earnings.

Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends or Distributions

If the business reports a net loss, subtract the loss instead of adding net income.

Retained earnings represents the cumulative profits a corporation has kept in the business instead of distributing them to shareholders. It is part of shareholders’ equity on the balance sheet. Retained earnings is not the same as revenue, current-period profit, or available cash.

Quick answers about retained earnings

What is retained earnings?

Retained earnings is the cumulative net income a corporation has earned since it began, reduced by net losses, dividends, and certain distributions or accounting adjustments.

The SEC defines retained earnings, or accumulated loss, as the cumulative net profit or net loss of an entity since its inception.

What is the retained earnings formula?

The simplified formula is:

Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings

Depending on the company and accounting period, the calculation may also include qualifying owner distributions or prior-period adjustments.

Where can you find retained earnings?

Ending retained earnings normally appears in the shareholders’ equity section of the balance sheet. Beginning retained earnings comes from the previous period’s balance sheet, while net income comes from the current income statement.

Is retained earnings the same as cash?

No. Retained earnings is an equity balance, not a bank account. The profits represented by retained earnings may have been used to purchase equipment, pay debt, finance customer receivables, acquire inventory, or support operations.

Can retained earnings be negative?

Yes. Negative retained earnings is commonly called an accumulated deficit. It can result from cumulative losses, distributions that exceeded accumulated profits, or certain accounting adjustments.

What is a good retained earnings balance?

There is no universal target. A useful retained earnings balance depends on the business’s age, profitability, capital needs, distribution policy, debt, cash flow, and growth plans.

What Are Retained Earnings and Why Do They Matter to a Business?

Each part of the formula comes from a different point in the accounting cycle.

Beginning retained earnings

Beginning retained earnings is the balance at the start of the accounting period. It should equal the ending retained earnings reported for the previous period.

For a new corporation completing its first accounting period, beginning retained earnings is normally zero.

Net income or net loss

Net income is the profit remaining after the business subtracts its expenses from revenue for the period.

A net profit increases retained earnings. A net loss decreases retained earnings.

The basic net-income formula is:

Net Income = Total Revenue − Total Expenses

Net income is reported on the profit and loss statement, also known as the income statement.

Dividends or distributions

Dividends are earnings distributed by a corporation to its shareholders. Dividends recognized for the accounting period reduce retained earnings.

The IRS describes dividends as distributions of a corporation’s earnings and profits to its stockholders, although financial-accounting retained earnings and tax earnings and profits are not identical concepts.

The terminology becomes more complicated for S corporations and other entity types. Most S corporation distributions, for example, are not classified as dividends for federal tax purposes. Distributions can also affect a shareholder’s stock basis.

Work with an accountant to determine how an owner payment should be recorded and how it affects retained earnings, equity, tax basis, and the recipient’s taxes.

Prior-period adjustments

In some cases, an accountant may adjust beginning retained earnings to correct a material error from a prior accounting period or reflect a change that accounting standards require to be applied retrospectively.

These adjustments should not be made simply to force the balance sheet to agree. They require appropriate documentation and professional review.

How Do You Calculate Retained Earnings Using the Standard Formula?

1. Find beginning retained earnings

Open the balance sheet from the end of the previous accounting period. Locate retained earnings in the equity section.

2. Find current net income or loss

Run a profit and loss statement for the current period. Use the final net income or net loss shown on that report.

3. Identify dividends or applicable distributions

Review the equity records for dividends or owner distributions that should reduce retained earnings.

Do not automatically treat every payment to an owner as a dividend. Owner compensation, reimbursements, loan repayments, draws, and distributions can have different accounting and tax treatment.

4. Account for approved adjustments

Include any prior-period adjustment or other equity adjustment provided by the company’s accountant.

5. Complete the calculation

Add net income to beginning retained earnings. Subtract dividends, qualifying distributions, net losses, and applicable adjustments.

6. Confirm the ending balance

The calculated ending retained earnings should agree with the balance shown in the shareholders’ equity section of the current balance sheet.

Retained earnings example for a residential contractor

Assume a residential remodeling corporation begins the year with $145,000 in retained earnings.

During the year, it reports:

• Beginning retained earnings: $145,000
• Net income: $62,000
• Dividends to shareholders: $25,000

The calculation is:

$145,000 + $62,000 − $25,000 = $182,000

The corporation ends the year with $182,000 in retained earnings.

A basic statement of retained earnings would look like this:

Statement of retained earnings	Amount
Beginning retained earnings	$145,000
Add: Net income	$62,000
Less: Dividends	($25,000)
Ending retained earnings	$182,000

The $182,000 is an equity balance. It does not mean the contractor has $182,000 sitting in its bank account.

The company may have used prior profits to:

• Purchase vehicles or equipment
• Pay down loans
• Carry customer accounts receivable
• Acquire construction materials
• Cover payroll between project payments
• Fund deposits on future jobs
• Build working capital

What if the business reports a net loss?

A net loss reduces retained earnings.

Assume a specialty contractor begins the quarter with $90,000 in retained earnings and reports:

• Beginning retained earnings: $90,000
• Net loss: $18,000
• Dividends: $5,000

The calculation is:

$90,000 − $18,000 − $5,000 = $67,000

Ending retained earnings is $67,000.

When using the formula, you can either subtract the net loss or enter it as a negative number:

$90,000 + (−$18,000) − $5,000 = $67,000

Avoid subtracting a negative loss twice.

Can retained earnings be negative?

Negative retained earnings means cumulative losses and reductions have exceeded cumulative profits retained in the company. The negative balance may be reported as an accumulated deficit.

For example:

• Beginning retained earnings: $20,000
• Net loss: $35,000
• Dividends or distributions: $5,000

The calculation is:

$20,000 − $35,000 − $5,000 = −$20,000

The corporation has a $20,000 accumulated deficit.

Negative retained earnings can result from:

• Several unprofitable periods
• A substantial one-time loss
• Startup costs exceeding early revenue
• Asset impairment or other accounting adjustments
• Dividends or distributions exceeding accumulated profits
• Errors requiring prior-period corrections

An accumulated deficit does not automatically mean the business is out of cash or about to close. A newer contractor may have negative retained earnings while investing heavily in equipment and customer acquisition.

However, a growing deficit should be investigated alongside cash flow, debt, project profitability, working capital, and the company’s plan for returning to profitability.

Is retained earnings the same as revenue?

No. Revenue and retained earnings measure different things.

Revenue is the income generated from selling products or services during a specific accounting period.

Retained earnings is a cumulative equity balance built from profits and losses over the life of the corporation, reduced by dividends and applicable distributions.

A contractor might generate $2 million of annual revenue but have much lower retained earnings because revenue must first cover materials, labor, subcontractors, overhead, interest, taxes, losses, and shareholder distributions.

Is retained earnings the same as net income?

No. Net income measures profit for one accounting period. Retained earnings accumulates profits and losses across multiple accounting periods.

Net income	Retained earnings
Measures profit or loss for a period	Measures cumulative earnings retained over time
Appears on the income statement	Appears in the equity section of the balance sheet
Resets for each new accounting period	Carries forward from one period to the next
Increases retained earnings when positive	Includes prior earnings, losses, and distributions

At the end of the accounting period, net income ultimately flows into retained earnings through the closing process.

Is retained earnings the same as owner’s equity?

Retained earnings is one component of shareholders’ equity for a corporation. It is not normally the entire equity balance.

Depending on the company, shareholders’ equity may include:

• Common stock
• Preferred stock
• Additional paid-in capital
• Retained earnings or accumulated deficit
• Treasury stock
• Accumulated other comprehensive income or loss

The SEC explains that shareholders’ equity generally includes the amount owners invested plus or minus the company’s cumulative earnings and losses, adjusted for distributions such as dividends.

The basic accounting equation is:

Assets = Liabilities + Equity

Retained earnings therefore affects total equity, but it does not equal total equity in every corporation.

How Do Retained Earnings Differ from Available Cash?

Retained earnings and cash appear in different sections of the balance sheet:

• Cash is an asset.
• Retained earnings is part of equity.

A profitable company can have substantial retained earnings and limited cash. This may happen when money is tied up in:

• Accounts receivable
• Equipment
• Vehicles
• Inventory
• Work in progress
• Prepaid costs
• Debt reduction

The reverse is also possible. A company can have cash from a new loan or owner investment while reporting low or negative retained earnings.

This is why retained earnings should not be used as a substitute for reviewing cash flow or the company’s bank balances.

For more on this distinction, read our guides to cash-flow analysis and the net cash-flow formula.

Where Are Retained Earnings Reported on a Company’s Financial Statements?

Retained earnings connects several financial statements.

Balance sheet

The ending retained earnings balance appears in the shareholders’ equity section of the balance sheet.

The balance sheet provides a snapshot at a specific date. It shows assets, liabilities, and equity, including the cumulative retained earnings balance.

Use our free balance sheet template to see how these sections fit together.

Income statement

The income statement reports revenue, expenses, and net income or loss for a specific period.

Net income from the income statement increases retained earnings. A net loss decreases it.

Our free income statement template can help organize the revenue and expense information used to determine net income.

Statement of retained earnings

A statement of retained earnings explains how the balance changed during the period.

It generally includes:

1. Beginning retained earnings
2. Net income or loss
3. Dividends or applicable distributions
4. Prior-period adjustments, when applicable
5. Ending retained earnings

Statement of shareholders’ equity

Some companies include retained earnings within a broader statement of shareholders’ equity. This statement explains changes in retained earnings and other equity accounts during the period.

Does every business use retained earnings?

Retained earnings is most directly associated with corporations.

Other business structures may use different equity accounts:

Entity type	Common equity terminology
C corporation	Retained earnings and shareholders’ equity
S corporation	Retained earnings, accumulated adjustments, shareholder distributions, and stock basis may all be relevant
Sole proprietorship	Owner’s capital and owner’s draws
Partnership	Partner capital and partner distributions
LLC	Depends on ownership structure, tax election, and accounting setup

An LLC taxed as a corporation may use retained earnings, while an LLC taxed as a partnership may maintain separate members’ capital accounts.

The accounting treatment and federal tax treatment are not always the same. Ask an accountant how the entity’s owner payments and equity accounts should be recorded.

What causes retained earnings to change?

Activity	Typical effect on retained earnings
Net income	Increases retained earnings
Net loss	Decreases retained earnings
Dividends	Decrease retained earnings
Certain owner distributions	May decrease retained earnings
Prior-period correction	May increase or decrease retained earnings
Owner investment	Usually increases contributed capital, not retained earnings
Business loan	Increases cash and liabilities, not retained earnings
Equipment purchase	Changes assets at purchase and does not directly reduce retained earnings
Loan principal payment	Reduces cash and debt but does not directly reduce net income
Depreciation expense	Reduces net income, which can reduce retained earnings
Owner salary	Reduces net income through payroll expense when properly recorded

The exact entries depend on the entity, accounting method, and circumstances.

Common retained earnings mistakes

Using revenue instead of net income

Revenue does not reflect the costs required to earn it. Use net income after expenses, not total sales.

Treating retained earnings as cash

Retained earnings does not show how much money is available to spend or distribute.

Forgetting the beginning balance

Retained earnings is cumulative. Except for a corporation’s first accounting period, the calculation should begin with the prior period’s ending balance.

Subtracting expenses twice

Operating expenses are already included in net income. Do not subtract them again when calculating retained earnings.

Subtracting equipment purchases directly

Purchasing equipment does not normally reduce retained earnings by the full purchase price at the time of purchase. Depreciation expense may reduce net income over time, while the purchase itself affects cash and fixed assets.

Subtracting loan principal as an expense

Loan principal reduces the liability and cash balance. Interest may be an expense, but principal repayment is not normally part of net income.

Confusing distributions with wages

Compensation paid for services and owner distributions have different accounting and tax consequences. This is especially important for S corporation shareholders who also work for the business.

Treating tax earnings and profits as book retained earnings

Corporate earnings and profits is a federal tax concept used in determining the treatment of distributions. It is related to, but not interchangeable with, retained earnings reported under financial accounting.

What is a healthy retained earnings balance?

There is no single retained earnings amount or ratio that every company should target.

A contractor with significant equipment needs may retain more profit to fund vehicles and machinery. A stable service company with limited capital needs may distribute a larger portion of its earnings.

Evaluate retained earnings in relation to:

• Company age
• Historical profits and losses
• Revenue growth
• Cash flow
• Working-capital needs
• Debt payments
• Equipment plans
• Seasonal fluctuations
• Distribution policy
• Expansion plans
• Emergency reserves
• Lender requirements

A growing positive balance may indicate that the business has generated cumulative profits and retained part of them. However, it does not prove the company has sufficient cash, healthy project margins, manageable debt, or strong financial controls.

Likewise, a declining balance is not automatically harmful. The company may have made a planned distribution after a profitable period. The reason for the change matters more than the direction alone.

How frequently should retained earnings be calculated?

Calculate retained earnings whenever financial statements are prepared.

For many contractor bookkeeping teams, that means:

• Monthly for internal management reporting
• Quarterly for owner and lender review
• Annually for year-end financial statements and tax preparation
• Whenever a significant dividend, distribution, or equity adjustment occurs

Monthly review makes it easier to identify unexpected changes while the underlying transactions are still recent.

How we help organize the information behind retained earnings

A reliable retained earnings calculation depends on accurate revenue, expense, asset, liability, and equity records.

With Neat, contractor bookkeeping teams can organize receipts and invoices, categorize financial transactions, reconcile connected accounts, and review the reports that supply many of the inputs used in retained earnings calculations.

Available financial reports include:

• Profit and Loss Statement
• Balance Sheet
• Cash Flow Statement
• Transaction Detail Report

The Profit and Loss Statement provides the current period’s net income or loss. The Balance Sheet shows assets, liabilities, and equity at a specific date. The Cash Flow Statement helps explain why the company’s cash balance may differ substantially from retained earnings.

Retained earnings can still require opening balances, equity classifications, distributions, and adjusting entries to be set up correctly. Work with your accountant when establishing or changing these accounts.

For a broader understanding of the calculations behind your financial statements, review our guide to 11 essential accounting formulas.

Use retained earnings with other financial measures

Retained earnings shows how cumulative profits, losses, and distributions have affected corporate equity. It does not show the complete financial condition of the business by itself.

Review it alongside:

• Net income
• Gross profit margin
• Cash flow
• Cash balance
• Working capital
• Accounts receivable
• Debt
• Project profitability
• Total shareholders’ equity

Together, these measures provide a more useful view of whether the business is profitable, liquid, appropriately financed, and prepared for future costs.

Start using Neat to organize transactions and create clearer financial reports.

This article provides general educational information and is not accounting, tax, investment, or legal advice.