How Are Retained Earnings Typically Used?


Quick Answer

Retained earnings are used by businesses to fund growth activities and projects, as noted by Chron Small Business. Retained earnings represent taxed profits that have not been distributed to shareholders. The account is represented as a credit on the balance sheet.

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Full Answer

Once net income, or profit, is calculated, the amount can either be distributed to shareholders or moved to the retained earnings account, states Chron Small Business. Balances in the retained earnings account are used to undertake research and development activities, purchase large equipment or pay off company debts. The Internal Revenue Service also offers certain incentives for businesses that continue to contribute to the retained earnings account.

High-level executives and board members determine how to use the retained earnings account, says About Money. The specific account is located in the shareholder's equity section on the financial statements.

Investors of a company utilize the retained earnings figure to determine how well a company is deploying its profits. For instance, if a company does not pay out a dividend but increases retained earnings, it is expected that growth is recognized through appreciation of the stock price. Retained earnings can become a negative balance if a company operates at a loss or if dividends are paid in excess of earnings, reports Chron Small Business. If these negative balances are not addressed, a company may be faced with more serious financial issues, such as bankruptcy.

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