Retained Earnings refers to a corporation's accumulated earnings minus the dividends paid out since the corporation was formed.
Retained Earnings refers to a corporation's accumulated earnings minus the dividends paid out since the corporation was formed. Retained Earnings represents the corporation's cumulative earnings that have not been distributed to its stockholders. It is recorded under shareholders' equity on the balance sheet.
Retained Earnings Formula
The formula calculates retained earnings by adding net income to (or subtracting any net losses from) beginning retained earnings and subtracting any dividends paid to shareholders:
Retained Earnings Interpretation
Companies generally retain earnings in order to invest them for intrinsic growth, by spending the money on research and development or buying capital equipment.
Retained Earnings can become negative if a net loss occurs that is greater than the accumulated retained earnings. In such a case the figure may be referred to as retained losses, accumulated losses, or accumulated deficit. "Accumulated Deficit" may appear in the Accountant's Opinion in what is called the "Ongoing Concern" statement located at the end of required SEC financial quarterly report for public corporations.
Retained earnings represent how the company has managed its profits. When reinvested, those retained earnings are reflected as increases to assets or reductions to liabilities on the balance sheet.
A growing company normally avoids dividend payments, so that it can use its retained earnings to fund additional growth of the business in such areas as working capital, capital expenditures, acquisitions, research and development, and marketing.
As a company reaches maturity and its growth slows, it has less need for earnings retention, and so is more likely to distribute a portion of it to investors in the form of dividends. The same situation may arise if a company implements strong working capital policies to reduce its cash requirements.
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