Retained Earnings (RE) are defined as the cumulative net earnings or profits of any company after settling dividend payments. The word retained means that those earnings did not go to shareholders as dividends; rather, they were retained by the company.
These funds are mostly used to work capital, make fixed asset purchases, or pay off debt. In some cases, retained earnings decrease when a company runs into a loss or pays dividends and increase when new profits are created.
Retained Earnings are usually reported on the balance sheet under the shareholder’s equity section at the end of each accounting period. To calculate RE, the beginning RE balance will be added to the net income or deducted by a net loss, and then dividend payouts are subtracted.
How to Calculate Retained Earnings
The formula for calculating Retained Earnings (RE) is RE=BP+Net Income (or Loss)−C−Swhere:
BP=Beginning Period RE
C=Cash dividends
S=Stock dividends
What Are Retained Earnings?
The retained earnings of a company are the total net income of the corporation that the corporation retains at a particular point in time, the same as the reporting period.The Retained Earnings (RE) of any company represent a useful link between the balance sheet and the income statement as they are recorded underneath shareholder equity, which connects the two statements.
The motive for having these earnings retained comes from different reasons, which include spending on research and development, buying new equipment and machines, or other activities that will lead to the growth of the company.
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