Beginning + Net - Div = Ending RE
BND (Beginning + Net Income - Dividends)
The retained earnings equation shows how retained earnings changes over a period. Start with beginning retained earnings, add net income, subtract dividends declared, and you get ending retained earnings.
The retained earnings equation shows how retained earnings changes over a period. Start with beginning retained earnings, add net income, subtract dividends declared, and you get ending retained earnings.
Breakdown
Beginning RE
Retained earnings at start of period (from prior balance sheet)
Net Income
Profit from the income statement (or net loss)
Dividends
Distributions to shareholders (reduces equity)
Equals
Results in...
Ending RE
Retained earnings for the current balance sheet
Example
Beginning RE: $50,000. Net Income: $20,000. Dividends: $5,000. Ending RE = $50,000 + $20,000 - $5,000 = $65,000.
When to Use This
- ✓Preparing the statement of retained earnings
- ✓Linking income statement to balance sheet
- ✓Understanding dividend impact on equity
- ✓Finding missing values in financial statements
FAQs
Common questions about this mnemonic
If there's a net loss, it decreases retained earnings. The formula becomes: Beginning RE - Net Loss - Dividends = Ending RE. Companies usually don't pay dividends during loss years.
Yes, this is called an accumulated deficit. It occurs when cumulative losses exceed cumulative profits and dividends. It's shown as a negative number in shareholders' equity.
Dividends are distributions of profit to owners, not costs of generating revenue. Expenses reduce net income (they're on the income statement). Dividends reduce equity directly (they bypass the income statement). This matters for taxes: expenses reduce taxable income, but dividends do not.
Net income from the income statement flows into the retained earnings equation as the "N" component. The ending retained earnings then appears on the balance sheet in the equity section. This is the bridge between the two financial statements — without it, the balance sheet wouldn't reflect the period's profitability.