Retained earnings refer to the portion of a company’s net income that is not paid out as dividends but is instead retained for reinvestment in the business. Retained earnings can be thought of as the cumulative profits that a company has earned over time and has chosen to keep within the business.

The accounting equation is Assets = Liabilities + Equity. Retained earnings are a component of the equity section of the equation. The calculation of retained earnings through the accounting equation can be expressed as:

Retained earnings = Beginning retained earnings + Net income – Dividends

Here, beginning retained earnings represent the balance of the retained earnings account at the start of the accounting period. Net income refers to the company’s profit after all expenses and taxes have been deducted. Dividends refer to the portion of net income that has been paid out to shareholders as dividends.

For example, let’s assume that a company had beginning retained earnings of $100,000, net income of $50,000, and paid out $10,000 in dividends during the accounting period. The calculation of retained earnings would be:

Retained earnings = $100,000 + $50,000 – $10,000 = $140,000

Therefore, the company’s ending retained earnings balance would be $140,000.