A fraction of the profit that the company holds back after meeting all expenses, tax payments, and dividends defines the retained earnings of the company. In other words, it is the part of the profit that is leftover or held back after the payment of dividends to the shareholders. A point to note is that usually, only those companies having growth perception in the future retain profits. Else they may distribute the total earnings as dividends. The retention percentage may vary on the basis of the scope of growth. A company with high growth will retain more or vice versa. Retained earnings calculator helps the users calculate the total earnings kept by the company at the end of the accounting period after making payments of all the expenses and taxes. Some amount of this retained earnings is for investment, while the company creates a reserve out of the remaining portion before making a declaration for the dividend.
The main purpose of holding back earnings is to utilize them further for investments and generate income in the future. Investments can be for expanding, diversifying, or restructuring the business and exploiting any business opportunity.
The formula for calculating retained earnings of the company is as follows:
Retained Earnings = Openings Balance of Retained Earnings + Current Year’s Profit/(Loss) – Dividends, if any.
How to Calculate using the Calculator?
Insert the following data into the retained earnings calculator, and it will provide the result in a blink.
Opening Balance of Retained Earnings
Enter the amount of retained earnings of the company at the beginning of the year. It refers to the balance that the company had retained during the previous year after making all necessary provisions for expenses, taxes, and dividends.
Current Year’s Net Profit/(Loss)
The profit or loss made by the company during the current year is added to the previous year’s portion of earnings retained by the company. This ensures the amount that the company can utilize for paying dividends and making further investments. This is the net portion after deducting expenses and taxes.
Dividends are the return a company pays on its shares. This can be in the form of cash as well as stock. In both cases, there is a reduction in the reserves of the company get, which will ultimately reduce the ‘retained earnings. Cash dividends are simply paid out of the current year’s profits and reserves created from retained earnings. While, in the case of the stock dividend, a portion of these reserves is capitalized.
The retention of Company X was $75,000 last year, and its net income for the current year stands at $15,000. The company has paid a total dividend of $9,000 during the year. The earnings retained by the company are:
Retained Earnings = 75,000 + 15,000 – 9,000 = $81,000