To find retained earnings, you use the following formula: Retained Earnings = Beginning Retained Earnings + Net Income (or Loss) - Dividends Paid Here's what each component means:

• Beginning Retained Earnings: This is the retained earnings balance from the end of the previous period, found on the prior balance sheet under shareholders' equity.
• Net Income (or Loss): The profit or loss for the current period, as reported on the income statement.
• Dividends Paid: Any dividends distributed to shareholders during the period, which reduce retained earnings.

Steps to Calculate Retained Earnings

1. Identify Beginning Retained Earnings: Find the retained earnings balance at the start of the period (from the previous period's balance sheet).
2. Add Net Income or Subtract Net Loss: Add the net income earned during the current period (or subtract if it’s a net loss).
3. Subtract Dividends Paid: Deduct any dividends paid out to shareholders during the period.

Example

If a company had $50,000 in retained earnings at the start of the year, earned $20,000 in net income during the year, and paid $5,000 in dividends, the retained earnings at year-end would be: $50,000 + $20,000 - $5,000 = $65,000 This shows the accumulated profits kept in the business after dividends

. Retained earnings represent the cumulative profits a company has reinvested in itself rather than paid out to shareholders, reflecting its financial health and reinvestment capacity