Retained Earnings and Dividends
How Retained Earnings Change
Retained earnings represent cumulative net income that has not been distributed to shareholders. Companies may retain profits to finance expansion, reduce debt, or strengthen liquidity.
The retained earnings formula is: Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings.
- Net income increases retained earnings.
- Net losses reduce retained earnings.
- Cash dividends reduce retained earnings when declared.
- Stock dividends may reclassify equity but generally do not reduce total shareholders' equity.
Tip
Retained earnings are not the same as cash available for dividends.
Summary
Retained earnings track accumulated profits that remain invested in the business after dividend distributions.