Retained earnings is an account used to represent the accumulated earnings that the business has chosen to reinvest into its operations rather than distribute to its shareholders as dividends. Retained earnings change in each period of the business's operation as a function of the business's net income and the dividends that it declares. In short, the change to retained earnings in each period is equal to that period's net income minus the dividends declared for that period.
Calculate the business's net income for the period in question. Net income is equal to revenues minus expenses and can be found on the income statement. Sum of revenues and sum of expenses can also be found on the business's ledger as two of its major closing entries. For example, if a business made $20,000 in sales and incurred $14,000 in expenses to produce those sales, that business has made $6,000 in net income.
Calculate the dividends declared by the business for the period. Dividends are often declared on a per share basis. For example, if the above business declares a $5 dividend on its 400 common shares, that business has declared $2,000 in dividends.
Deduct declared dividends from net income to calculate the change in retained earnings. For example, this business has an increase of $4,000 to its retained earnings -- $4,000 being the difference between its net income and its dividends declared for the period. If the business had $20,000 in retained earnings at the period's start, it now has $24,000 in retained earnings at the period's end.
Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.