What Are Retained Earnings?
Formula, meaning, and a worked example.
Home › Accounting Glossary › Retained Earnings
| Found on | Balance sheet, equity section |
|---|---|
| Normal balance | Credit |
| Topic | Financial accounting · Equity |
Retained earnings in plain English
Each year a company earns a profit. It can pay some to owners as dividends and keep the rest. The profit it keeps, added up over the years, is retained earnings. It is a record of profits kept, not a pile of cash.
Worked example
Opening retained earnings are 40,000. The company earns a net profit of 15,000 and pays dividends of 5,000.
Closing retained earnings = 40,000 + 15,000 − 5,000 = 50,000.
- Treating retained earnings as cash. The profit may already have been spent on assets.
- Forgetting to subtract dividends.
Frequently asked questions
Where are retained earnings shown?
In the equity section of the balance sheet.
Can retained earnings be negative?
Yes. A negative balance is called an accumulated deficit and means cumulative losses exceed profits.
Are retained earnings the same as cash?
No. They show profits kept in the business, which may have been invested in assets such as equipment or inventory.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.