Guides
Retained Earnings: Formula, Meaning, and Examples
Retained earnings are the cumulative net profits a company has kept since it started, after subtracting every dividend ever paid to shareholders. The figure sits in the shareholders’ equity section of the balance sheet and represents earnings reinvested in the business rather than distributed. The formula is: Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings.
What retained earnings mean
Retained earnings are the running total of profits a company has earned and chosen to keep instead of paying out. Each period, net income increases the balance and dividends decrease it. The account is cumulative, so it reflects the entire history of the business, not just one year.
The balance answers a specific question: of all the profit this company has generated since inception, how much stayed inside to fund operations, pay down debt, or buy assets? A large, growing balance often signals a mature, self-funding business. A small or negative balance can signal a young company, heavy dividend payouts, or accumulated losses.
Retained earnings are an equity account, not cash. A company can report high retained earnings while holding little cash, because the retained profits may already sit in inventory, equipment, or receivables. The number measures reinvested profit, not liquidity.
Retained earnings formula
The retained earnings formula is: Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings. Net income comes from the bottom line of the income statement. Beginning retained earnings equal the prior period’s ending balance. Dividends are the cash or stock distributions declared to shareholders during the period.
| Component | Where it comes from | Effect on the balance |
|---|---|---|
| Beginning retained earnings | Prior period’s ending balance (balance sheet) | Starting point |
| Net income (or net loss) | Income statement bottom line | Increases (a loss decreases) |
| Dividends declared | Board resolution / statement of retained earnings | Decreases |
| Ending retained earnings | Calculated result | Reported in equity |
If the company posts a net loss instead of net income, the loss reduces the balance. If dividends and losses together exceed accumulated profit, the balance can turn negative. That negative figure is usually labeled an accumulated deficit.
Worked example
Assume Bright Ledger Inc., a US C corporation, begins its fiscal year with $200,000 in retained earnings. During the year it earns $85,000 in net income and the board declares $30,000 in cash dividends. Applying the formula gives ending retained earnings of $255,000, which the company reports in shareholders’ equity.
The table below runs three consecutive years, including a loss year, to show how the balance compounds and can shrink.
| Year | Beginning RE | Net income (loss) | Dividends declared | Ending RE |
|---|---|---|---|---|
| Year 1 | $200,000 | $85,000 | ($30,000) | $255,000 |
| Year 2 | $255,000 | $120,000 | ($40,000) | $335,000 |
| Year 3 | $335,000 | ($90,000) | ($20,000) | $225,000 |
In Year 3, the $90,000 loss and $20,000 dividend together cut the balance by $110,000. The account absorbs losses the same way it absorbs profit, in the opposite direction. Because the balance stayed positive, Bright Ledger still shows retained earnings, not a deficit.
Where retained earnings appear on the balance sheet
Retained earnings sit inside the shareholders’ equity section of the balance sheet, typically below common stock and additional paid-in capital. For a profitable company the account carries a credit balance. The equity section as a whole must satisfy the accounting equation: Assets = Liabilities + Equity.
The related statement of retained earnings (sometimes folded into a statement of stockholders’ equity) shows the roll-forward: beginning balance, plus net income, minus dividends, equals ending balance. Public companies filing with the SEC generally present this movement within the statement of changes in stockholders’ equity rather than as a standalone report.
Terminology varies by entity type. A C corporation reports retained earnings. A partnership or LLC taxed as a partnership typically reports partners’ capital instead, and a sole proprietorship uses owner’s equity. The underlying idea, cumulative reinvested profit, is similar, but the label and tax treatment differ. See our guide on reading a balance sheet for how equity fits with assets and liabilities.
Negative retained earnings (accumulated deficit)
Negative retained earnings, usually shown as an accumulated deficit, occur when cumulative losses and dividends exceed cumulative profits since inception. On the balance sheet the account then carries a debit balance and is presented as a subtraction within equity. It reflects the company’s entire history, so a single bad year rarely creates a deficit on its own.
An accumulated deficit is common and often benign for early-stage or high-growth companies that spend ahead of revenue. For an established company, a persistent deficit can signal sustained losses, aggressive dividends funded by borrowing, or distress. Lenders and investors read the trend, not just the sign, alongside cash flow and profitability.
A deficit does not automatically bar a company from paying dividends, but many state corporation statutes restrict distributions that would impair capital or render the company insolvent. Rules vary by state and entity, so directors often confirm distributable reserves before declaring dividends.
Retained earnings vs net income
Net income is a single-period result from the income statement: revenue minus all expenses for that period. Retained earnings are a cumulative balance-sheet figure that carries forward across periods. Net income for the period flows into retained earnings, but the two are not interchangeable. One measures a slice of time; the other measures the whole history.
| Feature | Net income | Retained earnings |
|---|---|---|
| Statement | Income statement | Balance sheet (equity) |
| Time frame | Single period | Cumulative since inception |
| Reduced by dividends? | No | Yes |
| Can be negative? | Yes (net loss) | Yes (accumulated deficit) |
| What it measures | Period profitability | Reinvested profit over time |
The link between them is the formula. Each period’s net income (or loss) is added to the prior retained earnings balance, and dividends are then subtracted. For a walkthrough of how net income is built, see our guide on reading an income statement.
How dividends and their type affect retained earnings
All dividends reduce retained earnings once declared, regardless of how they are paid. A cash dividend lowers both retained earnings and cash. A stock dividend reclassifies part of retained earnings into paid-in capital without moving cash. The reduction happens on the declaration date, when the obligation to shareholders is recorded.
The typical journal entry for a declared cash dividend debits Retained Earnings (or Dividends Declared) and credits Dividends Payable, a liability, until the cash is paid. Because the debit hits equity, the balance sheet total shifts from retained earnings toward a payable, then to reduced cash on payment. The distinction between distributions and taxable income matters for owners of pass-through entities; our cash vs accrual accounting guide covers timing rules that affect when income lands in the books.
FAQ
What is the retained earnings formula?
The retained earnings formula is Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings. Net income comes from the income statement, beginning retained earnings equal the prior period’s ending balance, and dividends are the distributions declared during the period. A net loss reduces the balance instead of increasing it.
Are retained earnings an asset?
No. Retained earnings are part of shareholders’ equity, not an asset. They represent cumulative profit the company kept rather than distributed. That profit may already be tied up in assets like equipment, inventory, or receivables, so a high retained earnings balance does not mean the company holds an equal amount of cash.
Is retained earnings the same as cash?
No. Retained earnings measure reinvested profit over the company’s life, while cash is one specific asset. A company can show large retained earnings and little cash if profits were spent on assets or used to repay debt. To gauge liquidity, review the cash balance and cash flow statement, not retained earnings.
What causes negative retained earnings?
Negative retained earnings, called an accumulated deficit, arise when cumulative losses and dividends since inception exceed cumulative net income. Common causes include sustained operating losses, large early-stage investment ahead of revenue, or dividends paid beyond earnings. Because the account is cumulative, one weak year rarely creates a deficit by itself.
How do dividends affect retained earnings?
Dividends reduce retained earnings when they are declared. A cash dividend lowers retained earnings and eventually cash. A stock dividend shifts value from retained earnings into paid-in capital without using cash. The reduction is recorded on the declaration date, often through a Dividends Payable liability until the distribution is actually paid.
Where do retained earnings appear on financial statements?
Retained earnings appear in the shareholders’ equity section of the balance sheet, usually below common stock and additional paid-in capital. The period-over-period change is shown in the statement of retained earnings or, for many public filers, within the statement of changes in stockholders’ equity that reconciles beginning and ending equity balances.
Do LLCs and partnerships have retained earnings?
Generally no, not under that name. Retained earnings is a corporation term. LLCs taxed as partnerships and partnerships typically report partners’ capital, and sole proprietorships use owner’s equity. The concept of accumulated, reinvested profit is similar, but the account label and the tax treatment of distributions differ by entity and state.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.