Retained earnings are also known as RE, is basically an amount of net income which gets left after the company paid the dividends to their shareholders. A business can either generates the profit, which considers as positive or negative for losses. Well, positive profits help the business in various ways. However, most of the time, the profit gets paid to the shareholders, but companies also reinvest the amount for growth in the company. The money which is not paid to the shareholders also count as retained earnings.
What is the Formula of Retained Earnings?
The formula of retrained earning or RE follows:
RE = BP + Net Income or Net loss – C-S
BP = beginning period of retained earnings
S =Stock dividends
C= cash dividends
For example, if the company’s balance sheet and the income statements show beginning RE as $ 77, 732, Ending RE as $ 78, 732, Net income as $ 5, 297.
For calculating the dividends, $77,232 – $78,732 + $5,297= $3,797
To get the RE, here the formula will be used: $77,232 + $5,297 – $3,797 = $78,732
Which means $78,732, is the retaining earnings of the company.
What’s the purpose of using RE?
There is a link that the RE shows between the company’s balance sheet and income statement. They both are mentioned under the tag of shareholder’s equity where both statements connect. However, there can be a various purpose behind using the RE; it also includes investing in new equipment as well as machines for the working. It can be used for research and development or any other company’s activities that can help in growth. This is used so the company can achieve the targets more easily in the future.
What is the Use of RE?
Those traders who look for gains which are short terms prefer to get the dividends payments on instant gains. However, there are different uses of RE that can company do, including
- The amount can be dividing among the company’s shareholders or the owners; it will be called dividends
- The amount can be used for expending the work as well as the business. Including the increment in carrying of production or hiring more people to the company
- For launching the variants or new products, the amount can be used.
- It can be used for repaying the outstanding loans or debts if the company have any
- It can be used for purpose like share buybacks
The RE can be the reserve money of eh company which they can reverse for doing future development in different ways to boost up the potential chances of growth. Not just that the creditors and investments look for positive deals and company which have constant growth but also for the company, it can do the positive changes. Apart from this, retained earnings can help the company to pay off the loans, which means the creditors can get their money back without any kind of risk.