Retained Earnings

Retained Earnings refers to the cumulative amount of net income that a company has retained, rather than distributed to shareholders as dividends. It reflects the portion of a company’s profit that is reinvested in the business or used to pay off debt.

In the context of the balance sheet, Retained Earnings is calculated by taking the beginning retained earnings, adding net income (or subtracting net loss) for the current period, and then subtracting any dividends paid to shareholders. This amount can be used for various purposes, such as funding new projects, paying off liabilities, or saving for future growth.

For example, if a company has $100,000 in retained earnings at the beginning of the year, generates a profit of $50,000 during the year, and pays out $20,000 in dividends, the retained earnings at the end of the year would be calculated as follows:

$100,000 (beginning retained earnings) + $50,000 (net income) – $20,000 (dividends) = $130,000 (ending retained earnings).