Retained earnings explained
Retained earnings are the profits a company has earned over its life and kept in the business, rather than paying out to its owners. They sit in the equity section of the balance sheet, next to the money the owners put in.
The formula is simple: beginning retained earnings + net income − distributions (or dividends) = ending retained earnings. A loss reduces retained earnings, and a company that has lost more than it has earned shows a negative balance, often called an accumulated deficit.
At the end of each fiscal year, the year’s income and expense accounts are effectively rolled into retained earnings, so the next year’s income statement starts from zero. Corporations and S corporations show retained earnings as a separate line; sole proprietorships and partnerships usually show the owner’s or partners’ equity instead.
Example: rolling forward one year
A small corporation starts the year with $40,000 of retained earnings, earns $25,000 of net income and pays $10,000 in dividends:
| Amount | |
|---|---|
| Beginning retained earnings | $40,000 |
| Add: net income for the year | + $25,000 |
| Less: dividends paid | − $10,000 |
| Ending retained earnings | $55,000 |
The $55,000 is not cash in the bank; it’s the share of the company’s equity that came from profits it kept.
Where you’ll see it in fiscal50
In fiscal50, income and expense accounts start at zero each financial year. On the Balance Sheet, earlier years’ profit shows as Retained Earnings, and this year’s profit to the report date shows as the Net Income line under it in equity.
Closing a month in fiscal50 locks it but doesn’t move any balances into retained earnings. For corporations and S corporations, opening capital is set up in equity accounts such as Retained Earnings and Common Stock.