Can someone explain to me what retained earnings are? Why are these other statements closed at the end of a period? Is that helpful in understanding the company's financial situation?
What It Is:
Retained earnings are the sum of a company's profits, after dividend payments, since the company's inception. They are also called earned surplus, retained capital, or accumulated earnings.
How It Works/Example:
Let's assume Company XYZ has been around for five years. During this time, it reported the following net income:
Year 1: $10,000
Year 2: $5,000
Year 3: -$5,000
Year 4: $1,000
Year 5: -$3,000
Assuming Company XYZ paid no dividends during this time, XYZ's retained earnings equal the sum of its net profits since inception, or in this case, $8,000. In subsequent years, XYZ's retained earnings will change by the amount of each year's net income, less dividends.
Why It Matters:
It is important to understand that retained earnings do not represent surplus cash or cash left over after the payment of ...
The expert defines retained earnings and other statements closed.