The main difference between retained earnings and profits is that retained earnings subtract dividend payments from a company’s profit, whereas profits do not. Where profits may indicate that a company has positive net income, retained earnings may show that a company has a net loss depending on the amount of dividends it paid out to shareholders. Instead, they reallocate a portion of the RE to common stock and additional paid-in capital accounts.

Let’s look at this in more detail to see what affects the retained earnings account, assuming the goal is to create a balance sheet for the current accounting period. Here, we’ll see how to calculate retained earnings for the end of the third quarter (Q3) in a fictitious business. Retained earnings represent a company’s accumulated profits or losses.

Retained Earnings vs. Net Income

It is possible for a company not to raise enough revenues to cover its costs. In that case, the company operated at a net loss rather than a net profit for the accounting period. That loss, which is a negative profit, would translate to negative retained earnings.

And while you might be excited about all your plans to use your profits, what’s something you’re not so excited about? Figuring bookkeeping for startups out where to record those profits on your balance sheet. A retained earnings account can help you track your residual income.

How do you calculate retained earnings?

Most businesses include retained earnings as an entry on their balance sheet. The figure appears alongside other forms of equity, like the owner’s capital. However, it differs from this conceptually because it’s considered to be earned rather than invested. The formula to calculate retained earnings encompasses those elements.