Detailed Definition
Ploughed-back profits, commonly referred to as retained earnings, represent the amount of net income that a company retains after distributing dividends to its shareholders. These profits are reinvested in the business for purposes such as expansion, research and development, debt repayment, and other operational needs. Retained earnings are essential for the sustainable growth and financial health of a company.
Examples
- Tech Startup Growth: A tech startup might decide to plough back 80% of its profits into the business to accelerate product development and expand its market presence.
- Manufacturing Firm: A manufacturing company may use retained earnings to upgrade its machinery and improve production efficiency, contributing to long-term growth.
- Debt Repayment: A retailer could use a portion of its retained earnings to pay off existing debts, strengthening its balance sheet and reducing interest expenses.
Frequently Asked Questions
What determines the amount of ploughed-back profits?
The amount of ploughed-back profits is determined by the company’s net income and its dividend policy. The board of directors decides how much of the net income is distributed as dividends and how much is retained in the company.
Why are retained earnings important?
Retained earnings are crucial for a company’s growth and sustainability. They provide internal financing for business activities, which can reduce reliance on external debt and help in weathering financial downturns.
Can retained earnings be negative?
Yes, retained earnings can be negative if the company has incurred more losses than profits over time. Negative retained earnings are often referred to as an accumulated deficit.
How do retained earnings affect shareholders?
Retained earnings can benefit shareholders indirectly by funding activities that may increase the company’s profitability and, consequently, its stock price. However, they may also represent a missed opportunity for immediate dividend income.
Are ploughed-back profits taxed?
Retained earnings themselves are not taxed separately. Instead, they are part of the company’s overall earnings, which are subject to corporate tax. Shareholders are taxed on dividends paid out from the net earnings.
Related Terms
- Dividend: A portion of a company’s earnings distributed to shareholders.
- Net Income: The total profit of a company after all expenses, taxes, and costs have been deducted from revenue.
- Shareholders’ Equity: The residual interest in the assets of the company after deducting liabilities.
- Balance Sheet: A financial statement showing the assets, liabilities, and shareholders’ equity of a company at a specific point in time.
Online References
Suggested Books for Further Studies
- Financial Accounting by Robert Libby, Patricia A. Libby, and Frank Hodge
- Accounting Principles by Jerry J. Weygandt, Donald E. Kieso, and Paul D. Kimmel
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Accounting Basics: “Ploughed-back Profits” Fundamentals Quiz
Thank you for exploring the concept of ploughed-back profits with these in-depth questions. Continued learning in financial accounting will undoubtedly empower your prowess in business strategy and operational sustainability!
