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A corporation has a large balance in retained earnings. Does that mean that its dividends to stockholders will be increasing?

Author:
Harold Averkamp, CPA, MBA

Definition of Retained Earnings

Retained earnings is one part of a corporation’s stockholders’ equity. The amount reported in retained earnings is primarily 1) the cumulative amount of the corporation’s earnings and losses from the day the corporation began, minus 2) the cumulative amount of dividends distributed to the stockholders from the day the corporation was formed.

Large, profitable corporations may have retained earnings in excess of $1 billion. Newly formed corporations may have negative retained earnings, which are reported as a deficit. State laws require corporations to have a positive amount of retained earnings in order to pay cash dividends.

It is important to note that retained earnings does not mean that the corporation has the amount in the form of cash. To determine the corporation’s cash balance, you must look at the asset section of the corporation’s balance sheet.

Examples of a Corporation’s Retained Earnings in Relation to Its Dividends

When a corporation’s board of directors must decide on the amount of dividends to declare and distribute to its stockholders, the following corporation information should be considered:

The above considerations could mean that dividends will not be increased even though the corporation has a huge amount of retained earnings.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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