Accumulated earnings and profits (E&P) is an accounting term applicable to stockholders of corporations. Accumulated earnings and profits are a company's net profits after paying dividends to the stockholders, and serves as a measure of the economic ability of a corporation to pay such cash distributions.

Breaking Down Accumulated Earnings and Profits

End-of-year accumulated earnings and profits are the sum of beginning-of-year E&P and current period E&P less distributions to shareholders during the period. Income and losses are part of a period's E&P, but certain items—recognized for financial accounting purposes but not for income tax reporting purposes—are subject to adjustment. Since E&P is used as a metric for the capacity of a firm to pay distributions, items such as tax-exempt income or nondeductible expenses, which factor into income tax reporting, must be added back or subtracted from the E&P account. Calculating E&P each year is painstaking work for tax departments within a company, but it is very important to keep records current because they come into play for many corporate transactions. For example, a C corporation conversion to REIT requires a thorough accounting analysis of accumulated E&P before it is allowed to proceed.

Is Accumulated E&P the same as Retained Earnings?

No. Even though they may seem synonymous, technically they are different primarily because E&P is determinant in a corporation's ability to fund distributions. A company can lower the amount of its retained earnings via stock distributions or the establishment of a contingency reserve, but they will not negatively impact the company's aforementioned capacity to pay dividends to shareholders.