what are retained earnings ?

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What are Retained Earnings? – Guide, Formula, and Examples
Retained Earnings (RE) are the accumulated portion of a business’s profits that are not distributed as dividends to shareholders but instead are reserved for reinvestment back into the business. Normally, these funds are used for working capital and fixed asset purchases (capital expenditures) or allotted for paying off debt obligations.

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Retained Earnings in Accounting and What They Can Tell You – Investopedia
Retained earnings are the cumulative net earnings or profits of a company after accounting for dividend payments. As an important concept in accounting, the word retained captures the fact…

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Retained Earnings: What They Are and How to Calculate Them
What Are Retained Earnings? Retained earnings are any profits that a company decides to keep, as opposed to distributing them among shareholders in the form of dividends.   Dividends can be paid out as cash or stock, but either way, they’ll subtract from the company’s total retained earnings. Retained earnings are often used for business reinvestment.

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Retained earnings definition — AccountingTools
Retained earnings are the profits that a company has earned to date, less any dividends or other distributions paid to investors. This amount is adjusted whenever there is an entry to the accounting records that impacts a revenue or expense account. A large retained earnings balance implies a financially healthy organization.

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What are Retained Earnings? Definition, Formula, and Calculation
Retained earnings are profits or earnings of the business that have been kept for business use and not distributed to the owners or stockholders. In other words, retained earnings are accumulated earnings of a business after paying dividends or drawings to its stockholders or owners.

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What Are Retained Earnings? Definition, Examples & Importance
Retained earnings refer to the portion of a company’s net income that isn’t distributed to shareholders as dividends. Earnings that are retained instead of distributed to shareholders may…

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What are retained earnings and how to calculate them
Retained earnings are the amount a company gains after the taxation of its net income. Therefore, retained earnings are not taxed, as the amount has already been taxed in income. Dividends and shareholders Dividends refer to the distribution of money from the company to its shareholders.

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Retained earnings – What are retained earnings? | Debitoor invoicing
Retained earnings are typically used to for future growth and operations of the business, by being reinvested back into the business. In order for a business to keep functioning, they will redistribute their retained earnings into their business to either invest or pay off debts. …

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Understanding Retained Earnings – business.com
Retained earnings are one of the most important things small businesses need to know about accounting. Retained earnings matter because they measure the amount of a company’s net profits left over after all expenses have been accounted for, including the cost of goods sold, overhead, debt service, taxes, and shareholder distributions …

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Retained Earnings | Definition. Formula And Examples
Retained earnings provide a pool of money that can be used to finance new investments or expand operations. It is especially important for small businesses, which may not have access to traditional forms of financing. Retained earnings can also help a company to weather difficult times. A cushion of cash can help businesses stay afloat during challenging economic periods. In addition, reinvesting profits back into a company can help it grow and become more successful. It can lead to …

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Find sources: Retained earnings – news · newspapers · books · scholar · JSTOR (September 2020)
The retained earnings (also known as plowback[1]) of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that period, the net income (or net loss) at that point is transferred from the Profit and Loss Account to the retained earnings account. If the balance of the retained earnings account is negative it may be called accumulated losses, retained losses or accumulated deficit, or similar terminology.
Any part of a credit balance in the account can be capitalised, by the issue of bonus shares, and the balance is available for distribution of dividends to shareholders, and the residue is carried forward into the next period. Some laws, including those of most states in the United States require that dividends be only paid out of the positive balance of the retained earnings account at the time that payment is to be made. This protects creditors from a company being liquidated through dividends. A few states, however, allow payment of dividends to continue to increase a corporation’s accumulated deficit. This is known as a liquidating dividend or liquidating cash dividend.[2]
In accounting, the retained earnings at the end of one accounting period is the opening retained earnings in the next period, to which is added the net income or net loss for that period and from which is deducted the bonus shares issued in the year and dividends paid in that period.
If a company is publicly held, the balance of retained earnings account that is negatively referred to as 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 reporting at the end of each quarter.
Retained earnings are reported in the shareholders’ equity section of the corporation’s balance sheet. Corporations with net accumulated losses may refer to negative shareholders’ equity as positive shareholders’ deficit. A report of the movements in retained earnings are presented along with other comprehensive income and changes in share capital in the statement of changes in equity.
Due to the nature of double-entry accrual accounting, retained earnings do not represent surplus cash available to a company. Rather, they represent how the company has managed its profits (i.e. whether it has distributed them as dividends or reinvested them in the business). When reinvested, those retained earnings are reflected as increases to assets (which could include cash) or reductions to liabilities on the balance sheet.
Contents
1 Stockholders’ equity
2 Tax implications
3 See also
4 References
Stockholders’ equity[edit]
When total assets are greater than total liabilities, stockholders have a positive equity (positive book value). Conversely, when total liabilities are greater than total assets, stockholders have a negative stockholders’ equity (negative book value) — also sometimes called stockholders’ deficit. A stockholders’ deficit does not mean that stockholders owe money to the corporation as they own only its net assets and are not accountable for its liabilities, though it is one of the definitions of insolvency. It means that the value of the assets of the company must rise above its liabilities before the stockholders hold positive equity value in the company.
Retained earnings = opening retained earnings + current year net profit from p&l a/c – dividends paid in current year
Tax implications[edit]
A company is normally subject to a company tax on the net income of the company in a financial year. The amount added to retained earnings is generally the after tax net income. In most cases in most jurisdictions no tax is payable on the accumulated earnings retained by a company. However, this creates a potential for tax avoidance, because the corporate tax rate is usually lower than the higher marginal rates for some individual taxpayers. Higher income taxpayers could park income inside a private company instead of being paid out as a dividend and then taxed at the individual rates. To remove this tax benefit, some jurisdictions impose an undistributed profits tax on retained earnings of private companies, usually at the highest individual marginal tax rate.
The issue of bonus shares, even if funded out of retained earnings, will in most jurisdictions not be treated as a dividend distribution and not taxed in the hands of the shareholder.
Retaining earnings by a company increases the company’s shareholder equity, which increases the value of each shareholder’s shareholding. This increases the share price, which may result in a capital gains tax liability when the shares are disposed.
The decision of whether a corporation should retain net income or have it paid out as dividends depends on several factors including, but not limited to:
Tax treatment of dividends, and
Funds required for reinvestment in the corporation (called retention).
A number of factors affect the decision of the amount of profit that a corporation should retain, including:
Quantum of net profit.
Age of the business enterprise
Dividend policy of the corporation
Future plan regarding modernization and expansion.
See also[edit]
Dividend cover
Dividend payout ratio
Liquidating dividend
Reserve (accounting)
References[edit]
^ Baumol, William J.; Blinder, Alan S. (March 20, 2015). Microeconomics: Principles and Policy (13 ed.). Cengage Learning. p. 489. ISBN 1305534042.
^ What is a Retained Earnings Deficit? – Definition | Meaning | Example. My Accounting Course. Retrieved 2020-01-07.