Retained earnings is the cumulative total of net income that a business has kept rather than distributed to owners as dividends.
It’s an equity account that appears on the balance sheet. Retained earnings grows when the business earns a profit and shrinks when it distributes dividends or incurs net losses. At the end of each accounting period, net income (or net loss) from the income statement is closed into retained earnings through a closing entry. The balance carries forward from one period to the next, accumulating over the life of the business.
Retained earnings represents the reinvestment of profits back into the business. A high retained earnings balance doesn’t necessarily mean a company has that much cash on hand — the profits may have been used to buy equipment, pay down debt, or fund operations. Conversely, a company can have a negative retained earnings balance (sometimes called an accumulated deficit) if cumulative losses exceed cumulative profits. Investors watch retained earnings alongside dividend policy to gauge how a company allocates its profits between internal growth and shareholder returns.
Related terms
- Account — retained earnings is a permanent equity account
- Income statement — the source of the net income figure that flows into retained earnings
- Balance sheet — the financial statement where retained earnings appears under equity