What are retained earnings?

 Retained earnings are the portion of a company's net income that is not distributed to shareholders as dividends but instead is kept within the company for future use.¹ It's essentially the company's savings account.²

Here's a breakdown:

• Net Income: This is the profit a company makes after deducting all its expenses from its revenue.³
• Dividends: A portion of the net income that is paid out to shareholders.⁴
• Retained Earnings: The remaining net income that is kept within the company.⁵

Why do companies retain earnings?

• Funding Growth: Retained earnings can be used to finance future growth initiatives, such as:⁶
  • Expanding operations⁷
  • Launching new products or services⁸
  • Investing in research and development⁹
  • Acquiring other companies¹⁰
• Debt Reduction: Companies can use retained earnings to pay off debt, reducing interest expenses and improving their financial health.¹¹
• Financial Cushion: Retained earnings act as a financial cushion, helping the company weather economic downturns or unexpected expenses.¹²

How are retained earnings reported?

Retained earnings are reported on a company's balance sheet under the shareholder's equity section.¹³ It's an accumulated figure, meaning it includes the retained earnings from previous years.¹⁴

Key Points:

• Retained earnings are a valuable resource for companies.¹⁵
• They contribute to a company's financial strength and growth potential.¹⁶
• The decision to retain earnings or distribute them as dividends is a strategic one, often influenced by factors like the company's growth prospects, financial needs, and shareholder expectations.¹⁷

I hope this explanation is helpful! Let me know if you have any other questions.