How to calculate retained earnings for 2025

In 2024, the U.S. Small Business Administration reported that over 34.7 million small businesses operated in the United States. Many of them, whether they knew it or not, relied on retained earnings to fund growth, weather slow months, and maintain financial health.

Retained earnings might sound like an intimidating accounting term, but it’s really just the money your business keeps after paying expenses and shareholder dividends.

With rising interest rates and competitive markets, knowing how to calculate retained earnings is a good accounting habit and a strategic advantage. Understanding where this figure comes from, where to find it, and how to monitor it can help you make better business decisions.

What are retained earnings?

Retained earnings are the accumulated profits a business keeps instead of distributing to shareholders. Over time, they reflect the portion of net income reinvested back into the company.

This reinvestment can take many forms. A company might use these funds to develop new products, buy new equipment, or expand into new markets. They might also use them to pay off debt or build up a strong cash reserve for future needs.

A growing balance of retained earnings usually means a business is profitable. It also shows that the company is managing its money well for steady growth. It highlights management’s choice to build long-term value instead of short-term payouts.

A negative balance (often called an accumulated deficit) means the business has taken more losses than profits.

Understanding retained earnings is also key for both internal managers and outside investors. 

Managers see how much capital is available for growth without taking on new debt. Investors see how a company plans to reinvest profits, which can lead to higher future earnings.

Where are retained earnings located in the balance sheet?

You’ll find retained earnings on a company’s balance sheet, specifically within the Shareholders’ Equity section. The balance sheet shows a company’s financial health at a single point in time. It follows the basic accounting rule:

Assets = Liabilities + Shareholders’ Equity

In the Shareholders’ Equity section, retained earnings sit alongside other accounts like Common Stock.

While Common Stock represents money shareholders first invested, retained earnings are profits the business generated and held onto.

Retained earnings are a cumulative account. This means their balance carries over from one period to the next. Last year’s ending balance becomes this year’s starting balance. This ongoing tally shows a company’s past profits and current financial strength.

How to calculate retained earnings

Calculating retained earnings is a straightforward process. It updates the ongoing total based on a company’s financial performance.

For this calculation, youll need three key pieces of information:

1. Beginning Retained Earnings – This is the balance from the end of the previous accounting period. You can find this number on the prior year’s balance sheet.
2. Net Income (or Net Loss) for the Current Period – This is the company’s profit (or loss) after all expenses, interest, and taxes for the current period. You get this from the company’s income statement. A profit adds to retained earnings, while a loss subtracts from them.
3. Dividends Paid to Shareholders – This is the money a company paid out to its shareholders during the current period. Dividends directly reduce the amount of earnings kept by the business. You can find this on the statement of cash flows or the statement of retained earnings.

The calculation essentially shows how the company’s accumulated profits changed. It reflects current performance and any money given back to owners.

Retained earnings formula and calculation example

Here’s the formula to calculate retained earnings:

Ending Retained Earnings = Beginning Retained Earnings + Net Income (or Loss) − Dividends Paid

Let’s take a look at an example for the year 2025 using “Bright Future Co.,” a growing tech startup.

• At the end of 2024, Bright Future Co. had a Beginning Retained Earnings balance of $500,000. This number came from their December 31, 2024, balance sheet.
• During 2025, Bright Future Co. earned a Net Income of $150,000. This appeared on their 2025 income statement.
• In 2025, the company paid $30,000 in Dividends to its shareholders. This was recorded in their accounting records.

Now, let’s use the formula for Bright Future Co.’s Ending Retained Earnings for 2025:

• Ending Retained Earnings = $500,000 (Beginning RE) + $150,000 (Net Income) − $30,000 (Dividends Paid)
• Ending Retained Earnings = $650,000 − $30,000
• Ending Retained Earnings = $620,000

So, Bright Future Co.’s ending retained earnings for 2025 are $620,000. This amount will be on their December 31, 2025, balance sheet. It will also be the starting retained earnings for 2026.

This example shows how profits increase accumulated earnings, while dividends reduce them. The final number tells us how much profit the company chose to keep and potentially reinvest.

Stay on top of your financial health by keeping tabs on retained earnings

Regularly reviewing the earnings you’ve accumulated can reveal whether your business is generating sustainable profits, if your dividend policy is balanced, and whether you have enough reserves for growth.

Companies that actively manage retained earnings will be better positioned to invest in opportunities, withstand downturns, and build long-term stability.