Business, Legal & Accounting Glossary
Accumulated past profits, not distributed in dividends, available to finance investment in assets.
In accounting, retained earnings are profits that were not paid to a company’s shareholders as dividends.
They are reported in the ownership equity section of a firm’s balance sheet. The decision of whether a firm should retain profits or disburse them as dividends depends on at least two things: the firm’s judgement of its own investment opportunities relative to those available in the market and any difference in tax treatment of dividends paid now and capital gains expected to result from investing retained earnings.
Retained earnings are accumulated earnings that have not been distributed to shareholders but rather reinvested in the business. Put simply, the net income a company earns, less the dividends it pays, is the net addition to retained earnings for the accounting period. A company’s retained earnings are disclosed at or near the bottom of the shareholder’s equity section of the balance sheet. Accountants may prepare a separate “statement of retained earnings” that shows the change in retained earnings during the accounting period; however, the statement of retained earnings is often combined with the income statement.
Retained earnings may be appropriated for specific purposes (like bond payments) or unappropriated; only unappropriated retained earnings are available to be distributed as dividends. An appropriation of retained earnings may be disclosed on the balance sheet or in the footnotes to the financial statements. Note, however, that an appropriation of retained earnings does not imply that the amount is held and segregated as cash.
There are two sources of capital for a company: debt and equity. Debt is borrowed from a bank or other investors, while equity is what the company itself and its shareholders can provide.
Equity is composed of two major portions: Stock and excess capital on the one hand (where shareholders have purchased shares from the company) and retained earnings on the other.
Retained earnings is the portion of net income that the company has not paid out to its shareholders in the form of dividends and is, instead, keeping it inside the company to reinvest into the growth of the business. When the company is losing money, then retained earnings will shrink and go negative. When the company is making money, then it will grow and be positive.
When the company repurchases shares and does not use debt to do so, it is retained earnings that are tapped. Thus the claim that buying back shares is a return of money to shareholders. However, of course, only if this is done at a discount to the intrinsic value is this a worthwhile use of funds. When stock options are rampant and the company is repurchasing shares to keep dilution under control, then it is, instead, a transfer of earnings to the option holders instead of to outside shareholders.
The retention ratio is the percentage of net income that is retained.
Also known as accumulated earnings.
carried-forward
capital reserves
carried-over
undistributed profits
retained profits
accumulated earnings
Appropriated retained earnings
Accumulated earnings tax
Dividend
Net income
Payout ratio
Retention ratio
Shareholder's equity
Earnings not paid out as dividends but instead reinvested in the core business or used to pay off debt. On the balance sheet, retained earnings appear under shareholders’ equity. also called earned surplus or accumulated earnings or unappropriated profit.
Retained earnings are the portion of corporate profits that are kept, or “retained” by the business after dividends (if any) are paid to shareholders. Mathematically calculated, retained earnings would be net income minus dividends.
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This glossary post was last updated: 11th August, 2022 | 0 Views.