Are planning to start your own company? Are you an investor? Do you know the various financial terms related to the account of a company? Are you aware of what retained earnings are?
If you are the owner of a small business or have just begun investing in various businesses you may still not be very familiar with the term ‘retained earnings.' At the same time, you may actually be practicing re-investing or retaining the profits of your business. For future reference and the better functioning of your business and flawless business discussions, here are the details of what retained earnings, retained surplus, retained earnings ratio mean.
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What Are Retained Earnings?
There is a certain amount of profit generated by a company, the resources from which are used for paying the employees and various other expenses of the company. But, there is a certain amount of this profit that is not used for expenses; they are not distributed to shareholders in the form of any dividends. This amount is usually used for re-investing in the business itself or is kept aside for some specific objectives of the company, which may include, paying off a certain amount of debt or any other such thing. Generally, there are various other terms used to refer to retained profits, which include, accumulate profits, accumulated surplus, accumulated income, undistributed earnings and also earned a surplus. On your journey of dealing with the finances of your business venture, you may come across all of the above terms. Now, you are aware of what they mean and where exactly they are used. Retained earnings hold a direct relationship with the profit and the loss of the company; losses always reduce them. A profit often makes it easy to either increase the amount if required or even keep the same amount.
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Accounting Treatment of Undistributed Profits
Undistributed profits or retained earnings are always cumulative, which means, they will represent all the earnings of the firm that have been reinvested in the firm. This will include the past earnings and also the present earnings that the company has used to reinvest in the further functioning of the company itself. If you take a look at the retained earnings account section which falls under the Equity section of the balance sheet will always show the retained earnings from the inception of the company.
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It's Relation To Tax
Every company has to pay a certain amount of tax on their net income in a particular financial year. The amount which is added to the retained income is from the income that is calculated after the tax payment is done. So, it is the after tax payment net income of the company.
Are you new to the business scenario? Are you finding it hard to cope with the financial terms used for the accounts of your business? Did this article give you enough information to understand the term retained earnings and its uses? Please comment in the box below and let us know your opinion on this article.
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