RETAINED EARNINGS Meaning and
Definition
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Retained earnings refer to the portion of a company's net income that is kept and reinvested in the business instead of being distributed to shareholders as dividends. It represents the cumulative profits earned by a company since its inception, minus any dividends paid out to shareholders.
Retained earnings serve as a measure of a company's financial stability and growth potential. They are an essential component of shareholder equity on a company's balance sheet. This balance sheet item is calculated by adding the company's net income or profit after taxes to the previous retained earnings balance and then subtracting dividends declared or paid out.
Retained earnings are typically reinvested to fund the company's expansion, research and development, debt repayment, acquisitions, or other capital expenditures. These reinvestments are aimed at fueling growth, enhancing the company's competitive position, and creating more value for both shareholders and the business itself.
Retained earnings can be considered an internal source of financing for a company, as they allow for self-funding of projects without resorting to external fundraising or incurring debt. High retained earnings relative to a company's total assets indicate financial strength and the ability to withstand economic downturns.
Overall, retained earnings are a crucial financial metric that reflects a company's historic profitability, its capacity to generate future earnings, and the management's decisions regarding the allocation of profits for long-term growth and shareholder value creation.
Etymology of RETAINED EARNINGS
The term "retained earnings" has a straightforward etymology.
The word "retained" comes from the verb "retain", which means to keep or hold something back. In the context of finance and accounting, "retained" refers to the portion of a company's profits or earnings that are kept or held back instead of being distributed to shareholders or owners.
The word "earnings" comes from the verb "earn", which means to acquire or deserve something, typically through effort or work. In the business world, "earnings" refers to the profits or financial gains a company generates through its operations.
Therefore, "retained earnings" represents the accumulated profits of a company that have been retained or held back instead of being distributed as dividends to shareholders. This portion of profits is often reinvested in the company for various purposes, such as research and development, expansion, debt reduction, or future investments.
