At a Glance

The amounts that remain after a business pays all its costs, taxes, and dividends to its owners are called retained earnings.

Retained earnings tend to be reinvested in the business to boost capital, acquire new equipment, or finance marketing activities.

Whenever retained earnings go unused for more than one year, they're called accumulated profits.

A Simplified Example

Here is a simple example of how retained earnings came to be.

JJ Attorneys Income Statement for the quarter ended 31/12/2019

Why Retained Earnings matter to your business

Since retained earnings come at the end of your income statement after everything has been deducted, they determine whether a business is genuinely profitable to the point of the investing in itself.

The invested cash grows a company's assets to the point of boosting future profits and earnings (both dividends and retained earnings).

This is the concept that most small businesses use to grow into multinationals without much borrowing. As a business owner, instead of spending your entire business profit, consider retaining a portion of it as "retained earnings" and pumping it back into your business to foster organic growth.