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Calculation of Retained Earnings

Calculation of Retained Earnings
We can calculate retained earnings by using the following equation

\text {Retained earnings = Beginning retained earnings + Net income/loss – Dividends paid}Retained earnings = Beginning retained earnings + Net income/loss – Dividends paid

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Calculation of Retained Earnings
Just from $9/Page Beginning retained earnings: The beginning retained earnings are the previous year’s retained earnings. This is taken from the previous year’s balance sheet of an organization. Net income/Profits: Net income is that portion of the profit that is in the hands of the company after reducing the revenues from all the expenses, be it depreciation, cost of goods sold, interest expenses, salary and remuneration expenses, and adjustment for any extraordinary losses/gains and tax expenses during the year. This is that portion from which dividends can be paid. From Net income, earnings per share (EPS) is calculated. Dividends paid: Dividends are paid out of the net income/profits generated during the year to the company’s shareholders. The amount of dividend to be paid is decided by the Board of directors’ basis on their decisions to invest the net income in projects. Dividends can be paid monthly, quarterly, or semi-annually. It depends upon the management of the organization to when to distribute dividends and how much. Analysis of Retained Earnings: Usually hear three terms vis a vis – Revenue, Profits & Retained earnings. Suppose ABC Ltd sold 1,000 Televisions during the year at the rate of$55,000 each. Thus, Revenue shall be \$55,000,000(\$1000 \times 55,000).$55,000,000($1000Ã—55,000).Then the difference between Profits and Retained earnings is calculated. Profit is that part that the company owns after deducting all the expenses.

For example, there is revenue of $55,000,000. If the cost of goods sold was$38,000,000 and interest expense was $1,900,000. The tax rate for company is 30\%30%, the tax expense would be \left( {55,000,000 – 38,000,000 – 1,900,000} \right){\rm{ }} \times 30\% {\rm{ }} = {\rm{ }}\$ 4,530,000(55,000,000âˆ’38,000,000âˆ’1,900,000)Ã—30%=$4,530,000. Hence net income will be 10,570,000. And then Retained earnings are the part that an organization keeps after paying dividends. There are 10,000 shareholders, and the company decided to pay$76 to each shareholder. Thus, retained earning shall be \left( {10,570,000 – 760,000} \right){\rm{ }} = {\rm{ }}\$9,810,000(10,570,000âˆ’760,000)=$9,810,000.

Analyze the company’s age; usually, the older the companies, we can see more accumulated Retained earnings. Typically, the more profits earned by the company have more retained earnings. As an illustration, Assume the company’s initial RE is $120,000, the company has made a profit of$14,000 (Net Income), and the Board of Directors has decided to distribute a dividend of $2,000. Now, the RE calculation at the end of the financial year will be: Beginning Retained Earning Net Income$14,000
Dividend $2,000 Retained Earnings Beginning Retained Earning + Net Income – Dividend Retained Earnings$132,000

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