Definition
Retained earnings are the accumulated profits a business has kept since it started, after losses and distributions to owners. Each year's profit or loss is added at closing and dividends are deducted. They are part of equity on the balance sheet and show how much of the business has been funded by its own past results.
How it works
Retained earnings are not a pile of cash. The profit kept in the business may sit in inventory, receivables, equipment or debt repayments. A company can have large retained earnings and an empty bank account.
A negative balance, often called an accumulated deficit, means past losses exceed past profits. Lenders and investors watch it closely because it limits dividends in many jurisdictions and can signal solvency issues.
Changes are reported in the statement of changes in equity. Prior-period corrections and changes in accounting policy can adjust the opening balance directly, which should be disclosed.
Formula
Closing retained earnings = Opening retained earnings + Net profit (or - Net loss) - Dividends
Example: one year of retained earnings
Opening 39,000, profit 38,000 and dividends of 12,000 give a closing balance of 65,000.
| Item | Amount |
|---|---|
| Opening retained earnings | 39,000 |
| Net profit for the year | 38,000 |
| Dividends declared | (12,000) |
| Closing retained earnings | 65,000 |