Retained Earnings Calculator
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Retained earnings are essential for businesses to assess their financial health and internal growth potential. They represent the cumulative net earnings that remain after dividends have been paid out to shareholders.
Formula
The formula to calculate retained earnings is:
\[ RE = BP + \text{Net Income} - C - S \]
where:
- RE: Retained Earnings
- BP: Beginning Period Retained Earnings
- Net Income: Profit or Loss
- C: Cash Dividends
- S: Stock Dividends
Example Calculation
Assume the beginning period retained earnings are $10,000, net income is $5,000, cash dividends total $1,000, and stock dividends total $500. The retained earnings can be calculated as follows:
\[ RE = 10000 + 5000 - 1000 - 500 = 13500 \text{ dollars} \]
Common FAQs
What are retained earnings?
- Retained earnings represent the total earnings a business keeps after paying out dividends. They provide insight into a company's ability to grow without external financing.
Why are retained earnings important?
- They show a company's profitability over time and are crucial for reinvesting in operations, paying off debt, or funding other growth opportunities.
How are retained earnings used by businesses?
- Companies use them for expansion, research, debt repayment, or as a reserve against potential financial downturns.