Retained earnings

Definition

Retained earnings represent the cumulative amount of net income that a company has retained, rather than distributed to shareholders as dividends. They are an important component of equity on a company's balance sheet.

5 Must Know Facts For Your Next Test

1. Retained earnings increase when a company earns net income and decrease when dividends are paid out.
2. They are reported under the shareholders' equity section of the balance sheet.
3. Retained earnings can be used for reinvestment in the business, such as funding new projects or paying off debt.
4. A high level of retained earnings may indicate a profitable company with few dividend payouts.
5. The statement of retained earnings reconciles the beginning and ending retained earnings for a specific period.

Review Questions

• What impact does net income have on retained earnings?
• Where on the balance sheet would you find retained earnings?
• How do dividends affect retained earnings?

Related terms

Net Income:

The total profit of a company after all expenses and taxes have been deducted from revenues.

Dividends:

Payments made by a corporation to its shareholder members, often derived from profits.

Shareholders' Equity: The residual interest in the assets of the entity after deducting liabilities; it includes items like common stock and retained earnings.