The retained earnings equation is quite simple and essential for understanding a company’s profit retention. The formula is: Retained Earnings = Beginning Retained Earnings + Net Income – Dividends Paid. This formula shows how retained earnings change over a specific period. You start with the previous retained earnings balance, add the current period’s net income, and subtract any dividends paid to shareholders. This equation helps businesses track how much profit has been retained to support operations, pay off debts, or fund growth activities, ensuring transparency in financial reporting.
