What are Retained Earnings? | Retained earnings income statement

Retained earnings represent a useful link between the income statement and the balance sheet, as they are ...RetainedEarningsTheaccumulationofnetincomeafterdividendsHome›Resources›Knowledge›Accounting›RetainedEarningsWhatareRetainedEarnings?RetainedEarnings(RE)aretheaccumulatedportionofabusiness’sprofitsthatarenotdistributedasdividendstoshareholdersbutinsteadarereservedforreinvestmentbackintothebusiness.Normally,thesefundsareusedforworkingcapitalandfixedassetpurchases(capitalexpenditures)orallottedforpayingoffdebtobligations. RetainedEarningsarereportedonthebalancesheetBalanceSheetThebalancesheetisoneofthethreefundamentalfinancialstatements.Thesestatementsarekeytobothfinancialmodelingandaccountingundertheshareholder’sequitysectionattheendofeachaccountingperiod.TocalculateRE,thebeginningREbalanceisaddedtothenetincomeorreducedbyanetlossandthendividendpayoutsaresubtracted.Asummaryreportcalledastatementofretainedearningsisalsomaintained,outliningthechangesinREforaspecificperiod. ThePurposeofRetainedEarningsRetainedearningsrepresentausefullinkbetweentheincomestatementandthebalancesheet,astheyarerecordedundershareholders’equity,whichconnectsthetwostatements.Thepurposeofretainingtheseearningscanbevariedandincludesbuyingnewequipmentandmachines,spendingonresearchanddevelopment,orotheractivitiesthatcouldpotentiallygenerategrowthforthecompany.Thisreinvestmentintothecompanyaimstoachieveevenmoreearningsinthefuture.Ifacompanydoesnotbelieveitcanearnasufficientreturnoninvestmentfromthoseretainedearnings(i.e.,earnmorethantheircostofcapital),thentheywilloftendistributethoseearningstoshareholdersasdividendsorconductasharebuybacks. WhatistheRetainedEarningsFormula?TheREformulaisasfollows:RE=BeginningPeriodRE+NetIncome/Loss–CashDividends–StockDividends WhereRE=RetainedEarnings BeginningofPeriodRetainedEarningsAttheendofeachaccountingperiod,retainedearningsarereportedonthebalancesheetastheaccumulatedincomefromtheprioryear(includingthecurrentyear’sincome),minusdividendspaidtoshareholder

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