One of the most important financial and accounting concepts to be aware of when it comes to your company is retained earnings. Retained earnings can be seen as a business savings account that can grow or decrease, based on financial decisions. Mathematically, retained earnings are determined by:
Retained earnings = Net income Ė dividends + beginning retained earnings balance.
Letís assume this business scenario. A company currently has $10,000 in beginning retained earnings along with $7,000 in profit. During this set time the company paid $4,000 in dividends. Using the formula, the companyís current retained earnings value would be $13,000. ($7,000 Ė $4,000 + $10,000).
Itís important to note that retained earnings are not the same as net income, also known as revenue. Instead, retained earnings are based on a companyís total profit along with other factors. Retained earnings are a historical count of net earnings that havenít been paid out to shareholders.
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