How to calculate beginning retained earnings
Calculating beginning retained earnings is essential for any business owner or accountant looking to track a company’s financial progress. Retained earnings represent the net income that is left over after dividends have been paid to stockholders. Understanding how to calculate beginning retained earnings can provide valuable insight into a company’s financial health and growth potential.
Follow these steps to calculate the beginning retained earnings for your business:
1. Gather Financial Statements: To begin the process, you’ll need your company’s balance sheet and income statement from the previous fiscal year. These documents contain crucial information such as net income, dividends paid, and ending retained earnings for that year.
2. Determine Net Income: Review the income statement to find your company’s net income for the previous fiscal year. Net income is essentially your company’s total revenue minus expenses, taxes, and other costs.
3. Identify Dividends Paid: Next, on the balance sheet or statement of retained earnings, locate the amount of dividends paid to shareholders during the previous fiscal year. This number is pivotal in calculating retained earnings since it reflects the amount of profit that was distributed to shareholders.
4. Find Ending Retained Earnings: Look for the line item labeled “Retained Earnings” at the end of the previous year’s balance sheet; this represents your company’s ending retained earnings for that fiscal year.
5. Calculate Beginning Retained Earnings: To calculate the beginning retained earnings for your current fiscal year, use this simple formula:
Beginning Retained Earnings = Ending Retained Earnings (previous year) – Net Income (previous year) + Dividends Paid (previous year)
Plug in the numbers from steps 2-4 and perform the calculations accordingly.
6. Update Your Balance Sheet: Lastly, take your calculated beginning retained earnings number and update your current balance sheet or statement of retained earnings accordingly. This new figure should now appear as the starting point for determining retained earnings for the current fiscal year.
In conclusion, understanding how to calculate beginning retained earnings is critical for businesses to assess their financial strength, measure growth potential, and make informed decisions on dividend payments. By following these steps and using the provided formula, you can quickly and accurately determine your company’s beginning retained earnings.