Payroll and equity Updated November 2026

Retained earnings

Retained earnings is the cumulative net income a corporation has kept rather than paid out as dividends. Ending retained earnings equals beginning retained earnings plus net income (or minus net loss) minus dividends declared. The account is updated only by closing entries, dividends, and a few items such as prior period adjustments.

Syntax

Ending RE = Beginning RE + Net income - Dividends declared; Dr Income Summary / Cr Retained Earnings (net income); Dr Retained Earnings / Cr Dividends

Part	What it is
`Retained Earnings`	Permanent equity account with a credit normal balance.
`Deficit`	A debit balance in retained earnings after accumulated losses or dividends in excess of earnings.
`Appropriated (restricted) retained earnings`	A portion earmarked for a purpose such as plant expansion or a loan covenant, not available for dividends.
`Prior period adjustment`	Correction of a material error from an earlier year, recorded directly to beginning retained earnings.

Examples

Beginning RE 150,000 + Net income 80,000 - Dividends 20,000 = Ending RE 210,000

Result: Statement of retained earnings for the year

The three lines that make up the statement.

Dr Income Summary 80,000 / Cr Retained Earnings 80,000

Result: Net income posted to retained earnings

Closing entry at year end.

Dr Retained Earnings 20,000 / Cr Dividends 20,000

Result: Dividends closed; retained earnings down 20,000

Second closing entry affecting retained earnings.

Common mistakes

Treating retained earnings as cash: it is a claim on assets in general, not a pile of money; a company can have large retained earnings and little cash.
Posting revenue or expense directly to retained earnings during the year: these go through income statement accounts and reach retained earnings only at closing.
Forgetting that dividends reduce retained earnings even if unpaid at year end: the declaration, not the payment, lowers the balance.

Practice Retained earnings

These drills check your answer on live data, free, no account needed.

Closing revenuesHilltop Pet Sitting, Inc. closes its books through Income Summary. At year end, before closing, Service Revenue has a credit balance of $58,400 and Interest Revenue has a credit balance of $260. Record the entry that closes the revenue accounts.
Dividends declared and paidThe board of Granite Peak Outfitters, Inc. declares a cash dividend of $4,500 to its stockholders and pays it the same day. The company records dividends in a Dividends account.

Questions

What is the formula for retained earnings?

Beginning retained earnings plus net income minus dividends equals ending retained earnings.

Is retained earnings an asset?

No. It is part of stockholders' equity on the balance sheet, representing earnings reinvested in the business.

Can retained earnings be negative?

Yes. A negative balance is called a deficit and arises when cumulative losses and dividends exceed cumulative profits.

Closing entriesHow to close the books: close revenues and expenses to Income Summary, close Income Summary to Retained Earnings, then close Dividends. Worked example.
Cash dividendHow to record a cash dividend: Dr Dividends, Cr Dividends Payable on declaration; Dr Dividends Payable, Cr Cash on payment; nothing on the record date.
Stock dividendHow to record a stock dividend: small (under 20 to 25%) at market value, large at par, using Common Stock Dividend Distributable. Compared with a split.
Trial balanceA trial balance lists every ledger balance and checks that debits equal credits. Steps to prepare it, a worked example and how to find the error.