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What Does Retained Earnings Mean?
The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders' equity on the balance sheet.
The formula calculates retained earnings by adding net income to (or subtracting any net losses from) beginning retained earnings and subtracting any dividends paid to shareholders:
RetainedEarnings (RE) = Beginning RE + NetIncome - Dividends
Also known as the "retention ratio" or "retained surplus".
In most cases, companies retain their earnings in order to invest them into areas where the company can create growth opportunities, such as buying new machinery or spending the money on more research and development.
Should a net loss be greater than beginning retained earnings, retained earnings can become negative, creating a deficit.
The retained earnings general ledger account is adjusted every time a journal entry is made to an income or expense account.
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