Definition of Retained Earnings
Retained earnings is one component of the stockholders’ equity section of a corporation’s balance sheet.
Some refer to retained earnings as reinvested earnings since this part of the corporation’s cumulative earnings have not been distributed to the corporation’s stockholders in the form of cash dividends.
Examples of Reasons for Retained Earnings
The following are some examples of the reasons for a corporation to not distribute its retained earnings as cash dividends to its stockholders:
- To have cash available for unforeseen events and for increases in its costs
- To reduce its long-term debt or repurchase shares of its common stock
- To increase inventory to expand, to purchase in larger quantities for cost savings, etc.
- To acquire long-term assets for improved efficiencies, to reduce rent, etc.
- To satisfy stockholders who prefer appreciation in the value of the corporation’s common stock instead of receiving cash dividends that require current income tax payments
