What Businesses Need to Know About Retained Earnings

Retained earnings represent the percentage of net income that is not paid out as dividends, but instead is kept "in-house" by the company. This money can be used to reinvest in the company or to pay off any debts the company may have. The retained earnings account is important because it shows how much profit a company has made over time and how much of that profit has been reinvested back into the company.

What are Retained Earnings?

Retained Earnings is one of the most commonly used items on the income statement, and it is also something that is known as "Accumulated Earnings" or "Unappropriated Profit."

The retained earnings balance on the balance sheet is the amount of cash that has been retained by the corporation. In other words, it is the amount of net profits of a business that the owners have decided to reinvest back into the business to grow it rather than distributing the profits to the owners.

How to Calculate Retained Earnings?

The retained earnings for a company are calculated by adding the net income from the current period to the retained earnings from the previous period and then subtracting any net dividends that were paid to shareholders.

Retained earnings are calculated at the end of each accounting period and are based on the previous period's figure. The resulting number can be positive or negative, depending on the company's net income or loss over time. Alternatively, large dividends that exceed other figures can also cause retained earnings to go negative.

Any item that impacts net income or net loss will impact retained earnings. Examples of items that would impact retained earnings include sales revenue, cost of goods sold, depreciation, and necessary operating expenses.

What Retained Earnings Can Tell You

Retained earnings can reveal much about a company. They are an important indicator of a company's financial health and business performance. For example, high retained earnings might be a sign that the company has a strong business plan. Another example is that companies with a history of low retained earnings might be able to get more financing.

Knowing the amount of retained earnings can also help a business owner understand the financial goals of the company. If a company has a high retained earnings, the owner can decide to take a larger percentage of investment income to support the company and reduce retained earnings balances.

What are Negative Retained Earnings?

A company with negative retained earnings has failed to earn a profit for a predetermined period and is, therefore, retaining its losses. Failing to make a profit is not an uncommon occurrence for a business since failures will happen from time to time. If a company fails to earn a profit over several successive periods, however, the business owner should carefully evaluate the business, the earnings potential, and the ambitions of the company.

Conclusion

Retained earnings is one of the most important balance sheet figures. It is a vital number that can be calculated by bookkeepers and financial analysts alike.

Although not crucial to the general bookkeeping process, retained earnings can be an important indicator of a company's overall performance. For example, high retained earnings might be a sign that the company has a strong business plan. Another example is that companies with a history of low retained earnings might be able to get more financing.

All companies make decisions when it comes to how much money to refund to shareholders. Reinvesting this money in the company is often the most beneficial approach.

If you are looking for reliable bookkeeping services in New York, we can help. Totally Booked can provide one-time QuickBooks setup and training so that business owners can better understand their business finances. We can also do everything else accounting-related for you. Check out our service packages and tell us what you think is best for your business.