What Are Retained Earnings?
Retained earnings are the cumulative net profits a company has kept and reinvested in the business rather than distributed to owners as dividends. They appear in the equity section of the balance sheet and grow or shrink each period with profit, loss, and dividends.
What retained earnings are and why it matters
Retained earnings link the income statement to the balance sheet: each period's net income (less any dividends) rolls into the retained-earnings balance, building the company's accumulated profit over its life. A growing retained-earnings balance signals a business that's profitable and reinvesting — funding growth from its own earnings rather than outside capital. A negative balance (an accumulated deficit) shows cumulative losses have outweighed profits. Retained earnings aren't a pile of cash; they're a claim within equity, and the actual money may already be deployed in assets.
A worked example
A company begins the year with retained earnings of $250,000. During the year it earns net income of $90,000 and pays $30,000 in dividends. Ending retained earnings = $250,000 + $90,000 − $30,000 = $310,000. That $310,000 sits in the equity section of the balance sheet, representing all the profit the company has kept since it started, net of distributions.
How firms handle it today
Firms roll net income into retained earnings at year-end close (the "closing" entries) and reconcile the balance so the equity section of the balance sheet is accurate.
Related terms
- Equity
- Net income
- Balance sheet
- Retained earnings
- Shareholder equity
FAQ
How are retained earnings calculated?
Beginning retained earnings + net income − dividends = ending retained earnings.
Are retained earnings the same as cash?
No — they're an equity balance representing accumulated profit; the underlying cash may already be invested in assets or operations.
Can retained earnings be negative?
Yes — a negative balance, called an accumulated deficit, means cumulative losses and dividends have exceeded cumulative profits.