How is current period retained earnings calculated?

The calculation of current period retained earnings begins with the retained earnings from the previous period, often referred to as "prior retained earnings." To this amount, you add the net income that the company has earned during the current period. This net income represents the profits generated, which contribute to the overall equity of the company.

However, it is also essential to consider any dividends that the company may have declared and paid out to its shareholders. Dividends are distributions of earnings and effectively reduce the amount retained in the business. Therefore, to arrive at the current period retained earnings, you subtract the dividends from the total of prior retained earnings plus net income.

This sequence of addition and subtraction accounts for both the retained profits and the distribution of those profits to shareholders, leading to the correct formula: Prior Retained Earnings + Net Income - Dividends. This method accurately reflects the amount of earnings that the company retains for reinvestment or to cover future liabilities after accounting for distributions to shareholders.