How to Calculate Increase in Retained Earnings
Retained earnings reflect the profit or income a company has generated in a given accounting period, and retained for reinvesting and improving the overall efficiency. The value can be a negative one if the company has incurred losses. It helps creditors gauge the overall health of the company and the equity held by the owners.
Instructions
-
1
Firstly calculate the net income of the company at the end of the year. The value can be calculated or found by deducting all the expenses (tax included) of the current account period with the total revenues. This will be a usual process when you will calculate the income statement. Obtain the net income value from there for simplicity.
-
2
Subtract the amount of dividends you will pay or have been paid to the shareholders. This is important as dividends are the portion of the company’s income, usually decided by the board of directors, given to shareholders after incorporating all other expenses. This deduction will be made from the net income, which will help you to compute the retained earnings for the current year.
For instance, if your company had a net income of $700,000, and decided to pay dividends in the region of $200,000, then the value of the retained earnings will be $500,000 ($700,000-$200,000). This means that the company has retained $500,000 after accounting for all expenses, interest paid, taxes as well as dividends. -
3
To calculate the increase in retained earnings, you will first need to refer to the balance sheet to check for the retained earnings at the beginning of the period. This is the owners’ equity on the balance sheet, and shows the growth of the business at the start of the accounting period.
For simplicity, lets suppose that the retained earnings in the beginning were also $500,000. Adding this value to current retained earnings will give us the increase in retained earnings, which will be equal (500,000+500,000) $1000, 000.
