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Retained Earnings | Formula | How to Calculate Retained Earnings? - YouTube
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hello everyone hi welcome to the channel
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by clicking the bell ican friend today
we're going to learn a concept which is
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retained earnings now retain earnings is one of the most important part of any
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balance sheet on the liability section
shareholders equity in the liabilities
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part it has been recorded there's an
extract over here I wanted you to have a
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exactly a picturization view of where
exactly the retained earnings in recorded
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as you can see in the shareholders
equity there's a common stock there's
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additional paid in capital and we have
the retain earning retained earnings is
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sort of a profit now let's try and
understand this in a complete detail
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format now we need to first understand
that what exactly retained earning is all
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about see reading earnings is basically
the part of the net income okay or you
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can say it is the part of the net profit
which has been retained by the company
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and after paying any sort of a dividend
that are to the shareholders it is hence
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you know after paying the rivet in it it
is also known as your retain the surplus
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known as your written surplus or you can
also call that humilated earnings that
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is also a good word so a company retains
a part of the net profit on in the
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financial year so as to fund the future
projects invest in the new businesses
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acquisitions or taker of other companies
or paying of the debts it's been used
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now let's understand the retain earnings
formula so that we have exactly the idea
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how the things are been calculated
region earning is like you know the
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beginning retained earnings then you
have the net income that you earn during
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the year that's your profit and loss PNL
you need to deduct any sort of dividend
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that you have paid during the year and
that will give you your ending our a
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that is region earning so let's look at
the components of the re formula one by
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the first component is going to be the
beginning our you know the beginning re
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is basically and accumulated surplus
which is at the beginning of the
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financially of now an amount will be
added over here or it may be subtracted
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also it's not compensated things can be
added or it can be subtracted things can
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be added or it can be subtracted let's
say it has been added
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an amount will be added or subtracted
from the beginning re which will be
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reported at the end of the financial
year and the amount depends on the
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profit and loss made by the company and
any sub that is given in the form of the
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dividend to the share hole
now let's understand the net income
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portion of the part of the region on EC
net income is the company's you can see
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the total earning what is it it is the
total earnings of the company now in the
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financial year basically which is
calculated by subtracting any expenses
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such as you know the material cost
General General and admin it wind
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expenses salary of the employees
appreciation amortization interest to be
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paid on their taxes from the revenue
earned by the company and so on and so
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forth so if the revenue is let's say
more or if it is greater than all the
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expenses the company earns on net profit
or else you know the company incurs a
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net loss for the particular year so the
net income is also called the bottom
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line of the company and in it it appears
on the income statement of the company
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the next that is the dividend the
dividend is the portion of the earnings
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that has been distributed by the company
to the shareholders as a reward or for
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the investment in the company
so the dividend can be in the form of
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the cash payments or the stock payments
they also called us the bonus issues in
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case the company issues bonus shares it
increases the can say the common common
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shares that increases and you know the
paid in capital amount on the balance
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sheet also so to maintain the retained earning in the balance sheet such
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amount decreases from the RE and you know more of dividend paid by the company
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less is the retained earning in the
balance sheet that should be like very
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logical no there's a debate you know how
much the company should retained and and
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pay the rest to the shareholders which
is better I mean is our II that is a
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retained earnings is better or in the
dividend is better though this is a
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really great question for this many
authors like you know Graham and Dodd
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modigliani-miller approach we have if we
say the Gordon's growth model approach
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we have Walters approach so there
there's so many people who have exactly
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discussed regarding this particular
topic so well we are not getting into
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that but everyone have their own
point on this particular regard we are
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we here going to discuss an example
let's now look at some retained earning
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example in the calculation let's say
suppose at the beginning of the
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beginning re of the company is standing
at $1,50,000 the company has
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earned let's say closely to ten thousand
as a net part of the net income and the
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third portion the board of director or
the board of the company decides to pay
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a dividend which is closely to fifteen
hundred in the form of the dividend so
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the beginning retain earnings the net
income and the dividend is going to be
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part of this so the or ending the region
earning is going to be beginning plus
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earned less an amount paid that is going
to be your retained earnigs that is 158
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five hundred let's take the region
earning example of Colgate C re is a
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part of the shareholders on the balance
sheet so you know I'm gonna show you a
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consolidated retained earning in the
balance sheet of Starbucks and how re is
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reported under the shoulders equity
let's have a look as you can see over
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here this this is the detail of
shareholders equity power part and what
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we note that you know
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the retained earning of the Colgate which is our 19,922
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18,861 million gor the 2016 here and
2015 year we'll try and calculate the
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retained earning the balance sheet of the
Colgate bought 2016 and 15 another big
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beginning leader earning of the balance
sheet 18861 which is right visible in
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front of us and the net income of the
Colgate will be taken from the extract
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of the profit and loss account this is
the net income attributable to the
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colgate-palmolive company and that will
be utilized for for showing exactly how
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things are gonna work the here it is the
dividend that has been paid you can find
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the ending inventory something like this
18861 + 2441 that was net income
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and the dividend that was been paid that
was 13 0 so we get 19 9 22 million as
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the ending retained earnings so here we
have calculated Starbucks retained earningdd
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earnings so we took a very fresh example
from a real life company
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so here the re over here it's it's
positive and it is denoting that become
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he has experienced more profits than
losses and accumulated them over the
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years no but however if the company has
more losses than gains the re is re is
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going to be negative as simple as that
so for such company such negative
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balance is called as the acute now what
exactly is better is returning better or
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dividend what we have learned from above is that you know RE dividend they are
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the part of the same or kitty earnings
of the companies if one goes the other
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goes down so are your dividend which is
better for the investors and
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shareholders is the question over here
should the company read in the larger PI
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of the PI of the owning or should they
pay a small to ficident Vice versus
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keys
it generally investors things that you
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know the company which is not not being
dividend on or not increasing its
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dividend here on your is not doing when
operationally but you know that that may
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not be the case the company may be
written may be retaining its earning to
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invest in other projects or expanding
its operation so that you know it could
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grow at a higher rate and earn a return
on that dividend that has been paid to
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the investors so this will in turn
increase the share price of the company
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it's gonna be benefiting the
shareholders but it it may not be true
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for all such cases on a final note let's
get conclude that you know we have now
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got a fair idea about what is retail
earning we have also seen the re
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calculation and the management of the
company they basically try is really
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hard to read in a fair amount of the
earnings for us to meet the capital
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needs of the company as well as to
reward the investors for the investment
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so that's it for this particular topic
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