Definition of Retained Earnings

Retained Earnings represent the cumulative amount of net income that a company has retained, rather than distributed as dividends to shareholders. It appears in the equity section of the balance sheet and reflects the company's reinvested profits over time.

Retained Earnings Formula

Retained Earnings = Beginning Retained Earnings + Net Income − Dividends

Key Characteristics:

1. Cumulative Measure: Accumulates net income across accounting periods.

2. Not Cash: It’s an accounting entry—not a cash reserve.

3. Growth Indicator: High retained earnings may suggest reinvestment in the business.

4. Impacts Equity: Affects shareholders’ equity and financial ratios (e.g., Return on Equity).

Example:

If a company earns $1M in net income and pays $200K in dividends, retained earnings increase by $800K.

Learn more about this topic: Understanding the Strategic Value of a Statement of Retained Earnings