Retained earnings, or accumulated earnings, are the profits that have been reinvested in the business instead of being paid out in dividends. The number represents the total after-tax income that has been reinvested or retained over the life of the business. If the company has built up a net loss over time, then the balance sheet will show a negative number called accumulated deficit.
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Retained earnings is found in the Owners’ Equity section of the balance sheet. For our sample company below they have profits of $1,273,000 retained in the company. Amounts shown in thousands (000).
(Excerpts from Financial Intelligence, Chapter 12 – On the Other Side)
Sometimes a company that holds a lot of retained earnings in the form of cash – Microsoft is an example – comes under pressure to pay out some of the money to shareholders, in the form of dividends. After all, what shareholder wants to see his money just sitting there in the company’s coffers, rather than being reinvested in productive assets? Of course, you may see an accumulated deficit – a negative number – which indicates that the company has lost money over time.