How to Calculate Retained Earnings in the Accounting Process

What is the meaning of retained earnings? How to calculate retained earnings ( retained earnings ) and is included in what account? Here’s the explanation!

What are Retained Earnings?

What are retained earnings or retained earnings? As is known, the meaning and understanding of retained earnings is part of the company’s net profit that is retained by the company and is not paid out as dividends to shareholders.

This retained earnings statement is usually reinvested into the company, in order to become the main ‘fuel’ for the company’s continued growth, or used to pay off the company’s debts.

These retained earnings will be accumulated and reported as owner’s equity on the balance sheet.

The amount of retained earnings is usually determined by the policy of the board of commissioners of a company which of course will differ between policies in a company and other companies.

In the balance sheet, retained earnings are included in the liabilities position under the capital account.

The benefits of the report also calculate retained earnings in the accounting process itself, namely:

  1. To finance the company’s operations in achieving maximum profit.
  2. To pay off existing debts.
  3. As a reserve fund for the company’s investment needs.
  4. For the development of the company in the future.

The method of calculating the company’s retained earnings is as follows

After understanding the meaning of retained earnings, the next is an explanation of how to calculate it.

How to calculate or make a statement of retained earnings is as described below:

Collect Necessary Data from Company Financial Statements

Every company is required to officially document the company financial history.

If you can collect data and perform an analysis of the company’s financial statements, it will be easier for you to calculate retained earnings for the current period.

Use figures from official reports to find out the amount of retained earnings on a given date, net profit, and dividends paid, compared to manually calculate them.

Retained earnings including the company’s accounts up to the last recording period will be shown in the balance sheet, while the company’s net income will be shown in the income statement for the current period.

If you can get all this information, then the way to calculate retained earnings is with the following formula:

Net profit – dividends paid = retained earnings

Next, to calculate the cumulative net profit, add the retained earnings figure you just calculated to the current retained earnings balance.

For example, at the end of 2011, your business had a cumulative retained earnings balance of Rp. 512 million.

During 2012, your business generated a net profit of IDR 21.5 million and paid dividends of IDR 5.5 million.

The ending balance of retained earnings from your business is:

IDR 21.5 million – IDR 5.5 million = IDR
16 million IDR 512 million + IDR 16 million = IDR 528 million

So, on the report, your business’s retained profit is IDR 528 million.

If you don’t have net income information, start by calculating gross profit

If you can’t access the exact net profit value, you can calculate the net profit of a business by manually calculating it through a slightly longer process.

Gross profit is a number that is generated from the income statement and is calculated by subtracting the money from sales from the cost of goods sold.

For example, suppose a company managed to achieve sales of Rp. 150,000 in one quarter, but had to pay Rp. 90,000 for the goods needed to generate sales of Rp. 150,000.

The way to calculate gross profit for this quarter is:

Rp150.000 – Rp90.000 = Rp60.000

Calculate Operating Profit

Profit calculated from gross profit minus the total operating costs is operating profit.

Operating profit reflects the company’s profit after paying sales and operating expenses, such as wages that have been paid.

To calculate retained earnings, operating profit data is also needed.

To calculate this operating profit, subtract gross profit by the company’s operating costs (excluding the cost of goods sold).

For example, in the same quarter that our business made $60,000 in gross profit, there were payments of $15,000 in administrative costs and wages.

Thus, the way to calculate the company’s operating profit is:

Rp60.000 – Rp15.000 = Rp45.000

Calculate Net Profit Before Tax

To calculate net income before taxes, subtract the company’s operating profit by interest, depreciation, and amortization.

Depreciation and amortization are the depreciation of the asset value (tangible and intangible) over its economic life.

If a company purchases equipment for $10,000 with an economic life of 10 years, it incurs a depreciation expense of $1,000 per year, assuming the value depreciates evenly.

For example, our company pays interest costs of Rp. 1,200 and depreciation costs of Rp. 4,000.

So how to calculate the net profit before tax of your company is as follows:

Rp45.000 – Rp1.200 – Rp4.000 = Rp39.800

Calculate Net Profit After Tax

One of the data needed to calculate retained earnings is to know in advance the net profit after tax.

The last cost we have to take into account is taxes. Then how to calculate net profit after tax?

To calculate net income after tax, first, multiply the company’s tax rate by net income before taxes.

Next, to calculate net income after taxes, subtract this multiplied number from the net profit before taxes.

In the example we discussed, we assumed that the tax rate was 34%. The tax fee we have to pay is equal to,

34% (0,34) x Rp39.800 = Rp13.532

Further, we subtract this figure from the total net profit before tax as follows.

Rp39.800 – Rp13.532 = Rp26.268

Subtract the number of dividends already paid

After we calculate the company’s net profit after deducting all the costs that are our obligations, we have a number that we can use to calculate the amount of retained earnings during the current accounting period.

To calculate it, subtract the net profit after taxes by the dividends already paid.

In the example we discussed, we assumed that we paid dividends to investors of $1,000 for the quarter.

So how to calculate retained earnings for the current period is as follows:

Rp26.268 – Rp10.000 = Rp16.268.

Calculate the Ending Balance of the Retained Earnings Account

Don’t forget that retained earnings are a cumulative account that shows the net change in profit since the company’s inception to date.

To find out the amount of retained earnings as a whole, add the retained earnings from the current period to the final balance of retained earnings at the end of the previous accounting period.

We assume that our company has retained earnings of 30,000 to date.

Now the balance in our retained earnings account will be,

Rp30.000 + Rp16.268 = Rp46.268

The method of calculating retained earnings is of course different for each company.

This is due to differences in the number of dividends that have been agreed upon by the commissioners or differences in the types of companies.

When all the calculations above have been fulfilled, the remaining retained earnings can be returned to the company as an investment for the next quarter.

However, these retained earnings can also be allocated for other things in accordance with the agreement of the company’s commissioners.

Retained earnings are also possible to have a minus value because the company suffered a loss compared to the previous year.

Because the loss is greater than the total of all Retained Earnings, this allows the total retained earnings to be minus.

How? You can already answer the question what are retained earnings? Retained earnings include which account?

Again, the notion of retained earnings is net income that is not paid to shareholders but is replayed for the needs of business or company operations.

That’s an explanation of how to calculate retained earnings.

How to Calculate Retained Earnings Easier By Using the Mekari Journal Accounting Application

Profit calculation can be done by an expert accountant or to calculate profit more easily.

You can start creating a retained earnings report by using the business financial reports feature.

With Jurnal as accounting software, you can also see the company’s financial condition easily, quickly, safely, and comfortably.

Find complete information about the business financial report features of Mekari Jurnal by clicking the banner below.

Also, get a free trial of Mekari Journal for 14 days to get the experience of managing business finances easily.

Now you know how to calculate retained earnings, or how calculate retained earnings.

Then what the report looks like, as well as retained earnings including any accounts, has also been explained here.

You also understand that the definition of retained earnings is the company’s profit that is not paid to shareholders.

Hopefully, this information can be useful for you and don’t forget to share it on social media.

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