Retained earnings

What is retained earnings?

Retained earnings are the cumulative profits a company has kept rather than paid out to owners as dividends or distributions. Each period, net income adds to the balance and any dividends subtract from it. Reported in the equity section of the balance sheet, retained earnings show how much earned profit has been reinvested.

Formula

Worked example

Why it matters for fast-growing companies

Retained earnings link your income statement to your balance sheet, each period's profit flows here, which is why the two statements must tie out. For fast-growing companies, a negative balance (accumulated deficit) is common and normal; what matters is that the number reconciles cleanly and tells investors how profits have been used.

Related terms

• Accounting & closeBalance sheetA balance sheet is a financial statement showing what a company owns (assets), what it owes (liabilities), and the owners' stake (equity) at a single point in time.
• Accounting & closeIncome statement (P&L)An income statement, also called a P&L, reports a company's revenue, expenses, and resulting profit or loss over a period of time, a month, quarter, or year.
• Accounting & closeAccounting equationThe accounting equation states that a company's assets always equal its liabilities plus owner's equity.
• Accounting & closeTrial balanceA trial balance is a report that lists every account in the general ledger with its ending debit or credit balance, then totals each column.

Frequently asked questions