Cumulative profits kept in the business after dividends, reported within shareholder equity.
Retained earnings are the cumulative profits a company has kept in the business rather than distributing to shareholders as dividends.
They are part of shareholder equity on the balance sheet.
Retained earnings answer a simple question:
After a company earns profit, how much is left inside the business after shareholder distributions?
That retained amount may support:
expansion
debt reduction
working-capital needs
acquisitions
a larger cushion in future periods
This is the most common misunderstanding.
A company can have high retained earnings and still be short on cash. Retained earnings are an accounting accumulation of past profits minus dividends, not a cash account.
Those profits may already have been used for:
equipment purchases
inventory growth
acquisitions
debt repayment
So retained earnings show how much profit has been kept, not how much cash is sitting in the bank.
Retained earnings usually appear in the equity section of the Balance Sheet.
They connect directly to:
Net Income, which increases retained earnings
Dividend, which reduces retained earnings
That is why retained earnings help bridge the Income Statement and the balance sheet.
Suppose a company begins the year with retained earnings of $800,000.
During the year it reports:
net income of $250,000
dividends of $70,000
Ending retained earnings become $980,000.
Retained earnings can be negative.
That usually happens when cumulative losses and dividends exceed cumulative profits over time. In that case, the company may report an accumulated deficit instead of a positive retained-earnings balance.
Negative retained earnings do not automatically mean the company will fail, but they are an important signal that past profitability has been weak relative to losses and distributions.
Net Income: The profit figure that increases retained earnings.
Dividend: Distributions to shareholders that reduce retained earnings.
Shareholder Equity: The balance-sheet category that includes retained earnings.
Balance Sheet: The statement where retained earnings appear within equity.
Cash Flow Statement: Needed to understand how much cash actually backs accounting profits.