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Answer Posted / james e
The percentage of net earnings not paid out as dividends,
but retained by the company to be reinvested in its core
business or to pay debt. It is recorded under shareholders'
equity on the balance sheet.
The formula calculates retained earnings by adding net
income to (or subtracting any net losses from) beginning
retained earnings and subtracting any dividends paid to
shareholders:
Retained Earnings=Beginning Balance of Retained
Earnings+net income-Dividends paid out to shareholders.
Also known as the "retention ratio" or "retained surplus".
In most cases, companies retain their earnings in order to
invest them into areas where the company can create growth
opportunities, such as buying new machinery or spending the
money on more research and development.
Should a net loss be greater than beginning retained
earnings, retained earnings can become negative, creating a
deficit.
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