A company's accumulated retained earnings are the cumulative residual profits or losses since the start of its business activities. If it is a positive amount, representing an accumulated profit, it increases the owners' total equity on the balance sheet. Negative retained earnings mean the business has made an overall loss since inception, and this reduces the owners' equity. Residual earnings are non-distributed earnings. They remain in the company and are not distributed to the shareholders as dividends.
Calculate the net income for the period by deducting income tax due and interest paid from the operating profit or loss. The income statement shows the amount of net income after tax.
Deduct any dividends paid to shareholders from net income after tax. For example, if the net income was $500,000 for the period and the company paid out $50,000 in dividends, subtract $50,000 from $500,000 to give $450,000 retained earnings for the period.
Add retained earnings for the period to the company's retained earnings at the start of the period. Opening retained earnings are part of the owners' equity on the balance sheet and represent the accumulated retained earnings at the start of the period. In the first year of trading, opening retained earnings will be zero. In this example, if opening retained earnings were $750,000, add retained earnings for the period of $450,000 to arrive at the accumulated retained earnings of $1,200,000. If the company had a loss in the period, deduct the amount from opening retained earnings.