Retained Earnings
Also called: accumulated profits, reserves and surplus
What is Retained Earnings?
Retained earnings are the accumulated profits a business has kept rather than distributed to its owners. They appear under equity on the balance sheet and grow with each profitable year.
Why Retained Earnings matters
Retained earnings are the cheapest growth capital there is — no interest, no dilution. They are also the clearest measure of whether a business has genuinely built value over time.
Retained Earnings formula
Closing retained earnings = Opening + Net profit − Dividends or drawings
Accumulated losses reduce the balance and can turn it negative.
How Retained Earnings works in practice
They rise by profit and fall by losses and distributions. A business with years of profit and no retained earnings has been paying everything out, which limits its ability to fund its own growth.
Frequently asked questions
No. They may be sitting in stock, equipment or receivables rather than in the bank.