An example of retained earnings is when a company does not pay dividends on its profits for the year, choosing to keep the profits for future use. The amount of these profits, combined with any profits from past years kept for use, is the amount of retained earnings for that year. Profits are calculated by subtracting all expenses from earnings, including taxes.Continue Reading
Not all profits can be converted to retained earnings. Some debt instruments, such as bonds, must be paid on time using the profits from the year. Any dividends paid out cuts into retained earnings as well.
Any company can have retained earnings, though. While a corporation calculates retained earnings as the remaining profit after dividends, a single proprietor or partnership can have also retained earnings. For these simpler entities, retained earnings are calculated after any withdrawals are made from the company profits by the principal owners.
Retained earnings appear on the shareholder's balance sheet. This entry shows not only the retained earnings for the year but the beginning balance of retained earnings combining all previous years of operations. A total ending balance for retained earnings is listed as well, which rolls over as the beginning balance for the next year.Learn more about Accounting