Retained Earnings

Retained earnings refer to the amount of a company's net income that is kept within the company instead of being paid out as dividends to shareholders. These earnings are reinvested back into the company for growth and expansion purposes. Essentially, retained earnings represent the portion of profits that the company chooses to keep for internal use rather than distributing it to shareholders.

When a company earns a profit, it has several options for how to allocate those profits. One option is to pay out a portion of the profits as dividends to shareholders as a return on their investment. Alternatively, the company may choose to retain a portion of the profits for internal use to fund future projects, such as product development, research and development, or acquisitions.

Retained earnings are reported on a company's balance sheet in the equity section. This section shows how much money the company has received from its shareholders in exchange for ownership in the company (equity) and how that equity is being used to finance the company's activities. Retained earnings are included as part of shareholder equity.

While retained earnings can be a valuable source of funding for a company's growth and expansion, companies must strike a balance between retaining earnings and distributing dividends. A company that consistently retains a large portion of its earnings without paying dividends may indicate that the company is not generating sufficient returns for its shareholders or that it is not utilizing its capital effectively.