Retained Earnings
What is retained earnings?
Retained earnings are the cumulative profits a business has kept, instead of paying out as distributions or dividends, since it began. They are one component of equity on the balance sheet.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that closes each year's profit into equity and reconciles it to the books, so retained earnings roll forward correctly.
How it changes
- Net income for the period adds to retained earnings
- Distributions or dividends reduce it
- Prior-period corrections can adjust the opening balance
The figures below are illustrative. A firm starts the year with $200,000 in retained earnings, earns $80,000, and distributes $30,000. The ending balance is $250,000.
Why it matters for service firms
For owner-led firms, retained earnings show whether profit is building a cushion or being drawn out as fast as it is earned. Reading it with cash and distributions helps owners decide how much to reinvest.
Frequently asked questions
How is retained earnings different from cash?
Retained earnings is an equity balance showing accumulated profit, not a cash amount. A firm can have large retained earnings and little cash if profit was reinvested in assets or receivables.
Can retained earnings be negative?
Yes. Accumulated losses larger than accumulated profits create a deficit. Lenders and buyers read that as a risk signal, so track equity regularly and plan how to rebuild it.
Related terms and guides: owner draw, return on equity, year-end close, and general ledger.