Retained Earnings

In bookkeeping, held profit (in some cases plowback) alludes to the bit of net pay of a partnership that is held by the organization (furrowed back) as opposed to disseminated to shareholders as profits (paid out). So also, if the company acquires a misfortune, then that misfortune decreases the enterprise’s held profit equalization. In the event that the equalization of the held profit record is negative it might be called held misfortunes, collected misfortunes or gathered shortfall, or comparable phrasing.

On the off chance that an organization is freely held, the parity of held profit account that is contrarily alluded to as “aggregated shortfall” may show up in the Accountant’s Opinion in what is known as the “Continuous Concern” articulation situated toward the end of required SEC money related reporting toward the end of every quarter.

Retained earnings are reported in the shareholders’ equity section of the corporation’s balance sheet. Corporations with net accumulated losses may refer to negative shareholders’ equity as positive shareholders’ deficit. A report of the movements in retained earnings or losses are presented in the Statement of Retained Earnings or Statement of Retained Losses.

Due to the nature of double-entry accrual accounting, retained earnings do not represent surplus cash available to a company. Rather, they represent how the company has managed its profits (i.e. whether it has distributed them as dividends or reinvested them in the business). When reinvested, those retained earnings are reflected as increases to assets (which could include cash) or reductions to liabilities on the balance sheet.

Stockholders’ equity

When total assets are greater than total liabilities, stockholders have a positive equity (positive 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, though it is one of the definitions of insolvency. 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.

Retained earnings = net profit from p&l a/c – dividends paid

Dividends

The decision of whether a corporation should retain net income or have it paid out as dividends depends on several factors including, but not limited to:

  • Tax treatment of dividends; and
  • Funds required for reinvestment in the corporation (called retention).

A number of factors affect the decision of the amount of profit that a corporation should retain, including:

  • Quantum of net profit.
  • Age of the business enterprise

Dividend policy of the corporation

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