How do You Calculate Retained Earnings?

1Understand what retained earnings is. Retained earnings is a permanent account that appears on the balance sheet under the Stockholder's Equity heading. The account balance represents the company's cumulative earnings since formation that have not been distributed to shareholders in the form of dividends.

2Gather the necessary data from the company's financial statements. You will need the account balance for the firm's retained earnings (this will appear on the previous period's balance sheet), and you will need all the accounts that will appear on the current income statement. As an example, consider the figures presented below.

Cool Products, Inc. 3Calculate the gross margin. Gross margin is a figure presented on a multiple-step income statement, and is determined by subtracting the costs of sales from sales.

In the example above, gross margin would be (150,000 - 90,000) or $60,000. 4Calculate operating income. Operating income represents the company's income after all sales expenses and operating (ongoing) expenses have been paid.

To calculate it, subtract operating expenses from the gross margin. In the example above, operating income would be (60,000 - 15,000) or $45,000. 5Calculate pre-tax net income.

To do this, subtract expenses due to interest, depreciation, and amortization from the company's operating income. In the example above, pre-tax net income would be (45,000 - 1200 - 4000) or $39,800. 6Calculate after-tax net income.

To do this, first apply the company's tax rate to their pre-tax net income (by multiplying them together). In the example above, taxes would be (.34 * 39,800) or $13,532.