How to Calculate the Previous Year's Retained Earnings in Accounting
A company’s retained earnings balance in accounting is the total profits the company has kept that it hasn’t paid as dividends since the company began. The account balance changes each year as you earn profits and pay dividends to stockholders. Companies at different stages of growth have varying retained earnings balances. An older company typically has more retained earnings than a younger company that is establishing itself. You can calculate the previous year’s retained earnings account balance using information from your accounting records.
Find in your accounting records the retained earnings account balance at the end of the current year. For example, assume your company’s retained earnings balance is $235,000 at the end of the current year.
Identify from your records the amount of net income or net loss you had for the current year. In this example, assume you earned net income of $15,000.
Determine from your records the amount of dividends you paid during the year. In this example, assume your company paid $5,000 in dividends.
Subtract net income from the ending retained earnings balance. Alternatively, add a net loss to ending retained earnings. In this example, subtract $15,000 from $235,000 to get $220,000.
Add dividends to your result to calculate the retained earnings balance at the beginning of the year, which is the previous year’s ending retained earnings. In this example, add $5,000 to $220,000 to get $225,000 for the previous year’s retained earnings.
Monitor your company’s retained earnings each year. A growing retained earnings balance shows that you are generating profits and reinvesting them into the business.