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.
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.
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This glossary post was last updated: 6th August, 2021 | 3 Views.