Retained Earnings

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DEFINITION of 'Retained Earnings'

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:

Retained Earnings

Also known as the "retention ratio" or "retained surplus".

INVESTOPEDIA EXPLAINS 'Retained Earnings'

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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RELATED FAQS
  1. How are retained earnings related to a company's income statement?

    Retained earnings appear on a company's balance sheet and may also be listed on its income statement. Retained earnings may ... Read Full Answer >>
  2. How do I calculate dividend payout ratio from a balance sheet?

    The dividend payout ratio is an important aspect of fundamental analysis that can be calculated using easy-to-find data on ... Read Full Answer >>
  3. How do you calculate retained earnings per share?

    Calculating retained earnings per share involves taking net earnings, adding any currently held retained earnings, subtracting ... Read Full Answer >>
  4. Which transactions affect the retained earnings statement?

    Retained earnings are the portion of a company's income that management retains for internal operations instead of paying ... Read Full Answer >>
  5. Why would a stock that pays a large, consistent dividend have less price volatility ...

    To understand the differences in volatility commonly seen in the stock market, we first need to take a clear look at exactly ... Read Full Answer >>
  6. Can a company declare a dividend that exceeds its earnings per share?

    Yes, it can. In fact, many well-known Fortune 500 companies have paid dividends in years where they posted negative earnings ... Read Full Answer >>
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