, retained earnings
refers to the portion of net income
which is retained by the corporation rather than distributed to its owners as dividends
. Similarly, if the corporation makes a loss, then that loss is retained and called variously retained losses
, accumulated losses
or accumulated deficit
. Retained earnings and losses are cumulative from year to year with losses offsetting earnings.
Retained earnings are reported in the shareholders' equity section of the balance sheet. Companies with net accumulated losses may refer to negative shareholders' equity as a shareholders' deficit. A complete report of the retained earnings or retained losses is presented in the Statement of retained earnings or Statement of retained losses.
When total assets are greater than total liabilities, stockholders have a positive equity (positive book value
). Conversely, when total liabilities are greater than total assets, stockholders have a negative stockholders' equity (negative book value) — also sometimes called stockholders' deficit
. A stockholders' deficit does not mean that stockholders owe money to the corporation as they own only its net assets and are not accountable for its liabilities. It means that the value of the assets of the company must rise above its liabilities before the stockholders hold positive equity value in the company.
The decision of whether a firm should retain net income or have it paid out as dividends
depends on several factors including, but not limited to the:
- tax treatment of dividends; and
- The funds required for reinvestment in the corporation is called Retention.