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Simple English definitions for legal terms
accumulated earnings
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A quick definition of accumulated earnings:
Accumulated earnings are the profits a company has left after paying dividends to its stockholders. It shows how much money the company has kept for itself instead of giving it to the stockholders. To calculate accumulated earnings, you add the earnings from the beginning of the year to the current earnings and subtract any dividends paid to stockholders. This helps companies figure out how much profit they have and how much they can give to stockholders or invest back into the business. It's important for taxes and shows the company's dividend policy.
A more thorough explanation:
Accumulated earnings refer to the amount of a company's net profit that remains after paying dividends to stockholders. It is calculated by adding the accumulated earnings at the beginning of the year to the current accumulated earnings and subtracting any dividends paid to stockholders.
For example, if a company had accumulated earnings of $100,000 at the beginning of the year and earned an additional $50,000 during the year, but paid out $20,000 in dividends, their accumulated earnings at the end of the year would be $130,000 ($100,000 + $50,000 - $20,000).
Accumulated earnings are important for tax purposes and can also reflect a company's dividend distribution policy. If a company retains earnings and profits for the reasonable needs of the business, there will not be any accumulated tax. Dividends can only be distributed from accumulated earnings and profits.
For example, if a company has accumulated losses that exceed its current earnings, it does not have accumulated earnings and cannot distribute dividends.