Retained earnings
Retained earnings are the amount of profit remaining after a company has paid all costs, income taxes and dividends. BDC says they appear in the shareholders’ equity section of the balance sheet and, year after year, become part of the company’s equity alongside the money shareholders first invested.
A buyer reading a corporation’s financial statements can find retained earnings in the shareholders’ equity section of the balance sheet. BDC describes them as the portion of the company’s equity that can be used, for instance, to invest in new equipment, R&D and marketing. BDC says it is the cash flow statement that shows how money, including cash equivalents, has moved through the business during the period.
How BDC describes the calculation
BDC explains that net profit is what is left after variable costs, fixed costs and taxes. To obtain retained earnings, dividends are subtracted from net profit. BDC also describes a statement of retained earnings, which shows the cumulative earnings of the business after any dividends or distributions to shareholders, and the change between the opening and closing balances.
What to ask
- Do the statements include a statement of retained earnings, or only a balance sheet?
- Which dividends or distributions were paid in each year shown?
- Does each year’s closing balance match the next year’s opening balance?
For the wider picture, see what buyers look for in your financial statements and the entry on the balance sheet.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentWhat are retained earnings?
- 02Business Development Bank of CanadaGovernmentWhat are financial statements?
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