Retained Earnings

Retained earnings are the accumulated net profits of a company that are not distributed as dividends but reinvested in the business.

Explanation:
They appear in the equity section of the balance sheet and are calculated as:
Retained Earnings = Beginning RE + Net Income – Dividends

Example:
If a company earns $100,000 profit and distributes $30,000 as dividends, $70,000 is added to retained earnings.

Importance:
Shows how much profit is being reinvested for growth and stability.

Common Confusion:
Retained earnings are not cash; they are part of shareholder equity.