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Simple English definitions for legal terms
retained earnings
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A quick definition of retained earnings:
Retained Earnings are the profits a company makes that it doesn't give to its owners (shareholders) as money. Instead, the company keeps the money to use for things like making the business better, buying other companies, or paying off debts. The amount of Retained Earnings is found by adding up all the profits the company has made over time, subtracting any money it has given to shareholders as dividends, and then seeing how much is left. Some companies keep more Retained Earnings than others, depending on what they want to do with the money.
A more thorough explanation:
Retained Earnings are the profits a company has earned but has not paid out as dividends to its shareholders. This means that the company has kept the money for its own use instead of distributing it to its investors.
For example, if a company earns $100,000 in a year and pays out $20,000 in dividends to its shareholders, the remaining $80,000 is considered retained earnings. The company can use this money to reinvest in the business, pay off debt, or fund new projects.
The amount of retained earnings a company has can be calculated by adding the net income (or loss) to the retained earnings from the beginning of the accounting period and then subtracting any cash or stock dividends paid out.
Whether a company chooses to keep more retained earnings or pay out more dividends depends on its goals and the preferences of its shareholders. For example, a stable company with shareholders who prefer dividends may allocate more of its profits to dividends than to retained earnings. On the other hand, a growth-focused company may allocate more of its profits to retained earnings to fund new projects or pay off debt.