How do you compute ending retained earnings for a period?

How do you compute ending retained earnings for a period?

• A. Beginning retained earnings plus net income minus dividends/draws.
• B. Beginning retained earnings plus revenue minus expenses.
• C. Beginning retained earnings plus net income plus dividends.
• D. Beginning retained earnings minus net income.

Answer: (A)

Ending retained earnings comes from taking what you started with in retained earnings, adding the profits you earned (net income), and then subtracting what you paid out to owners (dividends or drawings). Net income increases retained earnings because it adds profits kept in the business, while dividends reduce it because they are distributions to owners. Even though revenue minus expenses equals net income, you still must subtract dividends to arrive at the ending balance. For example, if the beginning retained earnings are 100, net income is 40, and dividends are 15, ending retained earnings would be 100 + 40 − 15 = 125. So the correct approach is Beginning retained earnings plus net income minus dividends.

Ending retained earnings comes from taking what you started with in retained earnings, adding the profits you earned (net income), and then subtracting what you paid out to owners (dividends or drawings). Net income increases retained earnings because it adds profits kept in the business, while dividends reduce it because they are distributions to owners.

Even though revenue minus expenses equals net income, you still must subtract dividends to arrive at the ending balance. For example, if the beginning retained earnings are 100, net income is 40, and dividends are 15, ending retained earnings would be 100 + 40 − 15 = 125.

So the correct approach is Beginning retained earnings plus net income minus dividends.