Retained earnings
Encyclopedia
In accounting, retained earnings refers to the portion of net income
which is retained by the corporation
rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings.
Retained earnings are reported in the shareholders' equity section of the balance sheet
. Companies with net accumulated losses may refer to negative shareholders' equity as a shareholders' deficit. A complete report of the retained earnings or retained losses is presented in the Statement of Retained Earnings
or Statement of Retained Losses.
). Conversely, when total liabilities are greater than total assets, stockholders have a negative stockholders' equity (negative book value) — also sometimes called stockholders' deficit. A stockholders' deficit does not mean that stockholders owe money to the corporation as they own only its net assets and are not accountable for its liabilities. It means that the value of the assets of the company must rise above its liabilities before the stockholders hold positive equity value in the company.
Liabilities that exceed assets is the classic definition of bankruptcy
.
Net income
Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...
which is retained by the corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings.
Retained earnings are reported in the shareholders' equity section of the balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
. Companies with net accumulated losses may refer to negative shareholders' equity as a shareholders' deficit. A complete report of the retained earnings or retained losses is presented in the Statement of Retained Earnings
Statement of retained earnings
The Statement of Retained Earnings are basic financial statements.The statements explain the changes in a company's retained earnings over the reporting...
or Statement of Retained Losses.
Stockholders' equity
When total assets are greater than total liabilities, stockholders have a positive equity (positive book valueBook value
In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or Impairment costs made against the asset. Traditionally, a company's book value...
). Conversely, when total liabilities are greater than total assets, stockholders have a negative stockholders' equity (negative book value) — also sometimes called stockholders' deficit. A stockholders' deficit does not mean that stockholders owe money to the corporation as they own only its net assets and are not accountable for its liabilities. It means that the value of the assets of the company must rise above its liabilities before the stockholders hold positive equity value in the company.
Liabilities that exceed assets is the classic definition of bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
.
Dividends
The decision of whether a firm should retain net income or have it paid out as dividends depends on several factors including, but not limited to the:- TaxTaxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
treatment of dividends; and - Funds required for reinvestment in the corporation (called retention).
See also
- Dividend coverDividend coverDividend cover is the ratio of company's earnings over the dividend paid to shareholders, calculated as earnings per share divided by the dividend per share...
- Dividend payout ratio
- Liquidating dividendLiquidating dividendA liquidating distribution, sometimes called a liquidating dividend, is a type of nondividend distribution made by a corporation to its stockholders during its partial or complete liquidation. Like nondividend distributions, they are not paid out of the earnings and profits of the corporation...
- Undistributed profits taxUndistributed profits taxThe Undistributed Profits Tax was enacted in 1936 by the United States administration of President Franklin D. Roosevelt , during the Great Depression . The UP Tax was a revenue program for FDR's New Deal. The act was controversial even within FDR's United States Treasury Department, as some noted...