Retained earnings are more than just a line item in an accounting report—they’re a reflection of how much profit a business has kept after paying expenses and distributing dividends. For merchants relying on digital payments and modern processing platforms, tracking retained earnings accurately requires a working knowledge of transaction fees, chargeback activity, and operational costs tied to the payment system itself. While financial platforms typically report gross sales, they don’t always offer a clean view of net profit unless integrated properly with accounting systems. For merchants in fast-moving industries—especially eCommerce and retail—understanding how retained earnings flow through your payment stack is critical to forecasting growth and reinvesting wisely. This article explores how retained earnings are calculated and how payment infrastructure impacts your bottom line.
What Are Retained Earnings and Why Do They Matter for Merchants?
Retained earnings refer to the cumulative profit a company has kept over time, rather than distributing it to shareholders or owners as dividends. For small businesses and growing retailers, retained earnings are reinvested into inventory, staffing, marketing, or system upgrades. In the context of merchant services providers and card credit merchant processing, these earnings can be directly influenced by payment fees, reserve holds, and chargebacks. While top-line revenue might look healthy, hidden costs in your payment system can quietly drain retained earnings. Accurate accounting of these figures allows merchants to make smarter decisions around expansion, capital allocation, and pricing models. Retained earnings are not only a measure of past performance—they’re a key resource for shaping future strategy.
The Link Between Payment Systems and Retained Earnings
Every sale made through a credit card or point-of-sale terminal carries fees—both visible and hidden. From interchange rates to processor markups, merchants need to understand how these deductions affect their actual profit retention. If your merchant account processing setup includes tiered pricing or non-transparent fee schedules, you could be losing more than you realize. For businesses with high volumes or subscriptions, even a small margin change can significantly impact annual retained earnings. Integrating your payment data into your accounting system—whether via automated syncs or manual reconciliation—ensures accuracy and visibility. By connecting your POS reports with net profit analysis, you can align financial health with daily transaction realities.
Start with the Beginning Retained Earnings Balance
Your calculation begins with the retained earnings from the previous period—often found in your balance sheet. This figure represents the accumulated profits from prior years that haven’t been paid out or otherwise removed[1]. For businesses using accounting platforms, this number may be updated automatically each fiscal period. If you’re switching systems or calculating manually, make sure this starting value matches audited financial records. Beginning with the right baseline prevents future discrepancies and allows accurate tracking over time.
Add Net Income from the Current Period
Next, include your current period’s net income—your total revenue minus the cost of goods sold, operating expenses, and taxes. This figure is typically calculated from your income statement or profit and loss report. Net income reflects the actual earnings before any withdrawals or distributions. For companies using secure credit card processing, be sure to subtract all applicable transaction fees and service charges before finalizing this number. A strong net income directly increases retained earnings unless dividends are paid out[2].
Subtract Any Dividends Paid to Owners or Shareholders
If your business distributes profits to owners, partners, or shareholders, those amounts must be subtracted. Even small draws throughout the year can accumulate and impact your retained earnings total. It’s essential to keep clear records of when and how dividends are paid, whether in cash or stock. Some businesses choose to retain more profits for reinvestment, while others distribute regularly depending on their structure. Either way, these payments reduce the amount left to reinvest in the business.
Apply the Retained Earnings Formula
The standard formula is:
Retained Earnings = Beginning Retained Earnings + Net Income – Dividends
Once you’ve gathered all components, apply the formula to arrive at the updated retained earnings figure. This result is typically added to the balance sheet at the end of the period and becomes the baseline for the next cycle. Accurate calculation ensures your financial reports align with your payment activity and helps identify if revenue is translating to lasting value[3].
The Role of Merchant Processing in Earnings Retention
Even with strong sales volume, your ability to retain earnings depends on controlling costs at the transaction level. Merchant services providers and processors each have their own pricing models—some use flat-rate fees while others include interchange-plus or tiered pricing[4]. Reviewing your processor’s statements and comparing them against transaction records can uncover overcharges or inefficiencies. Merchants using payment pos systems should ensure fees are mapped clearly to sales data, especially if using multiple payment methods or locations. Without transparency, you may be overpaying for services that reduce overall profitability.
Best Practices for Tracking and Improving Retained Earnings
Integrate Your POS and Accounting Systems
Synchronizing your payment pos or ecommerce platform with your accounting software reduces manual errors and ensures real-time visibility into net revenue. Automated syncing tools are widely available and often supported by your payment gateway. Regular reconciliation between these systems helps identify gaps or inaccuracies early.
Review Processor Fee Structures Quarterly
Fees can change without notice, especially if you’re on a variable pricing model. Reviewing your merchant statement quarterly can help you identify unexpected rate increases or hidden charges. Switching to a more transparent provider may significantly boost your retained earnings.
Negotiate for Lower Rates or Better Terms
If your sales volume has increased, you may qualify for lower rates with your current provider—or better terms with a competitor. Use historical data to support your negotiation and request savings on chargeback fees, reserve requirements, or gateway costs.
Use Dashboards to Monitor Trends in Earnings
Real-time dashboards can give you insight into how much profit you’re keeping over time. Look for patterns in refund activity, seasonal cost spikes, or recurring deductions. Data-driven reporting helps you stay ahead of trends that could drain profitability.
Create a Rolling Forecast of Earnings Impact
Use historical payment data to forecast future retained earnings based on expected volume, known expenses, and marketing campaigns. Forecasting allows you to plan for capital investments or hiring decisions with more precision.
Involve Finance and Operations Teams
Retained earnings are not just a finance concern—they impact purchasing, staffing, and strategic planning. Share insights with cross-functional teams to align your payment decisions with company-wide goals. A unified approach ensures that every department contributes to profitability.
How Chargebacks and Reserves Affect Retained Earnings
For businesses considered higher risk—or those operating in industries with elevated refund rates—processors may hold reserves or impose penalties on disputed transactions. These chargebacks and rolling reserves can significantly reduce monthly cash flow and inflate expenses. If not tracked properly, they distort net income and retained earnings figures. Merchants should proactively use chargeback mitigation tools and review reserve policies regularly. Disputes that go unresolved can create permanent losses that go unnoticed in basic transaction summaries. Factoring these elements into your retained earnings model ensures you don’t overestimate your financial health.
Conclusion
Retained earnings provide a snapshot of long-term profitability—but for modern merchants, they’re also a reflection of how efficient your merchant account processing and payment systems are[5]. From overlooked fees to chargeback losses, there are dozens of hidden costs that eat away at your bottom line unless you track and mitigate them proactively. By using integrated tools, analyzing processor statements, and forecasting with transaction data, merchants can gain full visibility into how much revenue they’re really keeping. At Payment Nerds, we help merchants optimize their earnings by pairing the right secure credit card processing solutions with smart accounting practices. Whether you’re a startup or an enterprise, knowing how to calculate and improve retained earnings is essential to staying competitive and profitable.
Sources
- Intuit QuickBooks. “What Are Retained Earnings and How Are They Calculated?” Accessed April 2025.
- Forbes. “Understanding How Payment Processing Affects Small Business Profitability.” Accessed April 2025.
- FreshBooks. “How to Calculate and Track Retained Earnings.” Accessed April 2025.
- U.S. Small Business Administration. “Managing Your Business Finances.” Accessed April 2025.
- NerdWallet. “Merchant Services and Business Banking: What to Watch For.” Accessed April 2025.
