What is Retained Earnings?

Retained earnings is the equity account in a corporation that accumulates net income over the years, minus dividends or distributions paid. It answers the question: how much profit has the company kept since it started?

How it changes

At the end of each year, the year's net income is closed into retained earnings. Dividends or distributions reduce it. Losses reduce it and can make it negative, which is shown as an accumulated deficit.

Example

A corporation starts the year with retained earnings of $50,000, earns $30,000 and pays $20,000 in dividends. Ending retained earnings are $60,000.

Retained earnings vs cash

Retained earnings are not a cash balance. Profit kept in the business may have been spent on equipment, inventory or loan repayment. A company can have high retained earnings and little cash.

On tax returns

Corporate returns reconcile retained earnings on Schedule M-2 of Form 1120. S corporations track the accumulated adjustments account, which is similar but follows tax rules; see Form 1120-S. The IRS covers corporate distributions in Publication 542.

Sole proprietors and partnerships

Unincorporated businesses do not usually use a retained earnings account in the same way; profits and draws flow through owner capital or partner capital accounts. Some software shows "retained earnings" anyway, which can confuse owners.

See also owner's equity.

Related terms

• Owner's Equity: Owner's equity is the owners' stake in the business: assets minus liabilities.
• Net Income: Net income is what remains after all expenses are subtracted from revenue for a period.

Browse more definitions in the small business glossary.