Accumulated profit kept in the business after losses and dividends, reported within equity rather than as a cash balance.
Retained earnings is the portion of cumulative profit that has stayed in the business rather than being distributed to owners. It appears in equity, usually on the balance sheet or statement of changes in equity.
Retained earnings is one of the clearest links between the income statement and the balance sheet. Net income increases it, net losses reduce it, and dividends reduce it. That makes it an important signal of how much profit has been reinvested over time.
Retained earnings is not a cash reserve. It is an equity balance built from prior results. The basic roll-forward is:
| Component | Effect On Retained Earnings |
|---|---|
| Opening retained earnings | Starting balance |
| Net income | Add |
| Dividends | Subtract |
| Ending retained earnings | Resulting balance |
Closing entries move the period’s temporary income-statement balances into retained earnings at the end of the cycle. If cumulative losses exceed cumulative profits, the balance can become negative, often described as an accumulated deficit.
Opening retained earnings are 120,000. The company earns 45,000 during the year and pays 10,000 of dividends.
| Component | Amount |
|---|---|
| Opening retained earnings | 120,000 |
| Net income | 45,000 |
| Dividends | (10,000) |
| Ending retained earnings | 155,000 |
Ending retained earnings are 155,000.
Retained earnings is not a cash account or a pool of money sitting unused. It is an equity balance that reflects cumulative results kept in the business after dividends and losses.