On this page
Retained earnings accumulates net income and losses, reduced by dividends and any other changes charged to that equity account. It is not a separate bank balance. The business may have used its resources to buy equipment, repay debt, or hold assets other than Cash.
Calculate the ending balance
For a corporation whose only retained-earnings changes are income and dividends:
Beginning retained earnings + net income - dividends = ending retained earnings.
A net loss reduces the balance. A negative retained-earnings balance is often called an accumulated deficit. Other equity accounts still need to be examined; retained earnings alone is not total equity.
Distinguish the account from its calculated ending amount
The Retained Earnings account on an adjusted trial balance does not yet include the current period's closing transfers. Calculate ending retained earnings using the period's income and dividends before placing it on the balance sheet.
Closing then transfers those amounts into the ledger account. It does not create the income and does not move Cash. The income-to-equity walkthrough shows why the statements and ledger reach the same ending amount.
Read the other equity components
Common Stock records one component of owner investment. Retained Earnings records accumulated income less relevant distributions. These accounts explain different sources of equity and should not be combined before their changes have been explained.
More complex corporations can have additional components, including accumulated other comprehensive income. That account accumulates certain income items reported outside net income. Its balance is separate from retained earnings; later equity material explains those additional components.
Put the concept to work
Understand this concept
- Explain retained earnings as a continuing equity account affected by accumulated performance and distributions, not a segregated cash balance.
Analyze this concept
- Analyze a basic retained-earnings rollforward from opening balance through net income or loss and owner distributions to ending balance.
Learning resources
Choose a lesson, try an application, or inspect the sources behind this concept.
Build on these ideas
- Distribution to owner — Understand
To understand this concept: Required. Distributions can reduce retained earnings but remain owner transactions outside net income.
- Equity — Analyze
To understand this concept: Required. Retained earnings is one account explaining a source of change in the residual equity element.
- Expense — Understand
To understand this concept: Required. Expenses reduce period earnings before the net performance effect closes into equity.
Show 3 more prerequisites
- General ledger — Apply
To analyze this concept: Required. Opening balance and closing activity must reconcile to the ending continuing account.
- Retained earnings — Understand
To analyze this concept: Required. The rollforward must keep accumulated equity, period performance, and distributions distinct.
- Revenue — Understand
To understand this concept: Required. Revenue contributes to period earnings before the net performance effect closes into equity.
Lessons
Worked examples and cases
Practice
Common mistaken ideas
Sources
Broader topics
Related concepts
Show 7 more related concepts
Use this idea next
- Closing entry — Apply
Required level here: analyze. Required. The destination account must reconcile opening accumulated equity, net income or loss, and distributions.
- Income summary — Apply
Required level here: understand. Required. The last entry in the sequence lands in retained earnings.
- Net income — Analyze
Required level here: analyze. Required. Net income is one input to accumulated equity alongside opening balance and owner distributions.
Show 3 more next steps
- Retained earnings — Analyze
Required level here: understand. Required. The rollforward must keep accumulated equity, period performance, and distributions distinct.
- Statement of changes in equity — Analyze
Required level here: analyze. Required. Beginning balance, net income, and distributions must reconcile to ending retained earnings.
- Statement of changes in equity — Understand
Required level here: understand. Required. Retained earnings carries accumulated performance and distributions as one continuing component.
Used in these readings
These chapters explain or apply this concept. The label states how the chapter uses it.