What is Retained Earnings?

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Retained earnings, also known as undistributed profits, retained surplus, or accumulated earnings, are the portion of a company's profits that are kept or retained and not paid out as dividends. This retained amount is typically reinvested in the business, used to pay off debt, or reserved for future use. Retained earnings reflect the company's profitability and internal fund accumulation. The formula for calculating retained earnings is:Retained Earnings=Beginning Retained Earnings+Net Income−DividendsRetained Earnings=Beginning Retained Earnings+Net Income−DividendsRetained earnings are reported in the equity section of the company's balance sheet, indicating the accumulated profits over a period of time.

Definition

Retained earnings refer to the portion of a company's profits that are kept after dividends have been paid out. This fund is typically reinvested into the company's business development, debt repayment, or other corporate needs. Retained earnings are part of the company's net income and reflect the company's profitability and internal capital accumulation. The formula for calculating retained earnings is: Retained Earnings = Beginning Retained Earnings + Net Income - Dividends.

Origin

The concept of retained earnings originates from the basic principles of corporate accounting and has evolved with the development of modern corporate systems. The earliest records of retained earnings date back to the late 19th century when companies began systematically recording financial information to better manage and plan the use of funds.

Categories and Features

Retained earnings can be divided into two categories: statutory surplus reserve and discretionary surplus reserve. The statutory surplus reserve is the portion that must be extracted according to legal requirements, while the discretionary surplus reserve is extracted based on the company's needs. The main features of retained earnings are their flexibility and sustainability, providing long-term financial support for the company and reducing reliance on external financing.

Case Studies

A typical example is Apple Inc. Throughout its development, Apple has often retained a large portion of its profits as retained earnings for research and innovation, enabling it to continuously launch new products and maintain market competitiveness. Another example is Berkshire Hathaway, which has long refrained from paying dividends, instead reinvesting profits into various business areas, achieving sustained growth and value enhancement.

Common Issues

When analyzing retained earnings, investors often face the challenge of determining whether a company has effectively utilized its retained earnings. A common misconception is that high retained earnings are always beneficial, but the key is how the company uses these funds to generate higher returns.

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