Retained Earnings
Cumulative profits kept in the business rather than distributed as dividends.
Retained earnings represent cumulative net income since inception minus any dividends or distributions paid. This equity account grows with profitability and shrinks with losses or distributions. It serves as a primary source of internal financing for expansion, debt reduction, and equipment purchases without external borrowing.
Formula
Retained Earnings = Beginning Retained Earnings + Net Income − Dividends/DistributionsExample
A five-year-old consulting firm has earned $400,000 total and distributed $150,000 to the owner—retained earnings of $250,000 fund cash reserves and equipment.
Why It Matters for Your Business
A growing retained earnings balance means your company is building a financial cushion and self-funding future growth rather than relying on debt.
Related Terms
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Related Financial Guides & Resources
Automate Your Finances with AI
FiscalInsights uses AI to automate bookkeeping, track expenses, and forecast cash flow — so you can focus on your business.
Start Free Trial