What are retained earnings?
Each year, [net income](/glossary/net-income) increases retained earnings and [dividends](/glossary/dividend) reduce them. The balance links the [income statement](/glossary/income-statement) to the [balance sheet](/glossary/balance-sheet).
Formula
Closing retained earnings = Opening retained earnings + Net income (or − Net loss) − Dividends
Example
A company starts the year with $250,000 of retained earnings, earns $90,000 net income and pays $30,000 of dividends. Closing retained earnings = $310,000.
Retained earnings are not cash
A common misunderstanding: retained earnings are an accounting record of profits kept, not a pile of money. The cash may already have been spent on equipment, inventory or loan repayments.
Accumulated deficit
If a company has lost more than it has earned over time, the balance is negative and called an accumulated deficit. This is common in early-stage startups.
Why it matters
- Shows how much of the business has been funded by its own profits.
- In many countries, dividends can only be paid from distributable retained earnings.
- Investors compare retained earnings growth with profit to see how well reinvestment is working.