Retained earnings appear on the balance sheet under shareholder's equity. The statement of shareholders' equity will include the changes in ...Home/FreeResources/Accounting/RetainedEarnings(RE)RetainedEarnings(RE)GoranRadonovic|October14,2020WhatisRetainedEarnings?Retainedearnings(RE)isthecumulativenetincomethathasnotbeenpaidoutasdividendsbutinsteadhasbeenreinvestedinthebusiness.Forexample,businessescanusetheseearningstoreinvestintothecompanyforexpansionthroughthepurchaseofproperty,plantandequipmentortopayoffitsdebts.Retainedearningsappearonthebalancesheetundershareholder’sequity.Thestatementofshareholders’equitywillincludethechangesintheseearningsforaspecificperiod.RetainedEarningsFormulaRE=BeginningperiodRE+NetIncome/(Loss)–CashDividends–StockDividendsExampleCalculatetheretainedearningsbalanceattheendoftheperiod.Preferenceshareshavebeentreatedasdebtinthefinancials.Netincomecalculationisasfollows:Endingretainedearningsbalanceiscalculatedas:PointstoNoteRetainedearningsisabalancereportedonthebalancesheet.ThecalculationstartswiththebalanceattheendoftheprioryearNetincomeontheincomestatementincreasesthebalanceDividendswilldecreasethebalanceascashfallsandprofitispaidouttoshareholders(notinvestedinthecompany)ImpactfromNetIncomeAnyitemshownontheincomestatementwillalsoimpactretainedearnings,forexample,sales,costofgoodssoldandotheroperatingexpenses.Theseearningscanbenegativeduetocumulativenetlosses.ImpactfromDividendsCompaniescandistributecashtoshareholdersintheformofdividends.Whencompaniespaycashdividends,theytreatitasacashoutflowandrecordtheimpactinthecashflowfromfinancingsectionofthecashflowstatement.Thepaymentofdividendswillimpactboththecashandretainedearningsitemsonthebalancesheet.Thedividendspaymentcausescashtodecreasewithacorrespondingdecreasetotheearnings(equity).HowCompaniesUseRetainedEarningsThefollowingaresomeofthewaysthatcompaniescanusetheseearnings:Useforapossiblemergeroracquisitionwithanothercompany.Holdforsharebuybacks.Repayoutstandingdebts.Investinanewproduct