Retained Earnings.

What are Retained Earnings?

LIFE SUDHARA. is a company based in the City of Mithalanchal.

This year, the company generated bountiful profits, amounting to $1000 million.

So, the company decided to distribute some profits, to the shareholders.

The remaining profits were ploughed back into the business. Over a period of time this profit gets accumulated.

This accumulated capital is called Retained Earnings.

If a company has generated profits in the last couple of years, it will have accumulated profits, or else, accumulated losses.

It is also known as Retained Surplus, or Reserve and Surplus, or Retained Capital, or Accumulated Surplus.

What is the Formula to Calculate Retained Earnings?

Begin Retained Earnings + Net Profit – Dividends = End Retained Earnings

What can a company do with Retained Earnings?

Retained Earnings work as an internal source of finance.

If a company uses its Retained Earnings wisely, sky’s the limit for growth.

No tree has ever touched the sky, but one tree can be bigger than most of the trees.

A company can purchase assets, or reduce liabilities.

What is Return on Retained Earnings?

It tells how effectively a company uses its Retained Earnings.

If a company can’t employ these earnings wisely, it’s better to return it to the shareholders.

What is the Formula to Calculate Return on Retained Earnings?

Return on Retained Earnings = Net Profit / (Begin Retained Earnings – Begin Cash and Cash Equivalents)

Moral of the Story

Retained Earnings is the accumulated capital of the company.