Retained Earnings
Retained earnings is the cumulative total of net profits your business has earned since inception, minus any dividends or owner distributions paid out. It represents profits that have been kept ("retained") in the business rather than distributed to owners or shareholders. Retained earnings appear o
Retained Earnings Definition
Retained earnings is the cumulative total of net profits your business has earned since inception, minus any dividends or owner distributions paid out. It represents profits that have been kept ("retained") in the business rather than distributed to owners or shareholders. Retained earnings appear on the balance sheet under equity.
Retained Earnings in Practice — Example
A small SaaS company has been in business for three years. Year one net income: $40,000. Year two: $65,000. Year three: $80,000. The owner took $30,000 in distributions over those three years. Retained earnings = ($40,000 + $65,000 + $80,000) - $30,000 = $155,000. This $155,000 sits on the balance sheet as retained earnings — profit that's been reinvested in growing the company.
Why Retained Earnings Matters for Your Books
Retained earnings is the bridge between your income statement and your balance sheet. Each year's net income flows into retained earnings, connecting the two most important financial statements. If retained earnings doesn't tie out, something in your books is wrong.
Growing retained earnings signals a healthy, self-funding business. A company that consistently adds to retained earnings is generating more profit than it distributes — building a financial cushion for growth, downturns, or investment.
For potential buyers, investors, or lenders, retained earnings tells a story. High retained earnings means the business has a track record of profitability. Negative retained earnings (accumulated deficit) means the business has lost more than it's earned — a red flag for financing.
How Retained Earnings Shows Up in QuickBooks
In QuickBooks Online, retained earnings appears automatically on the Balance Sheet report under Equity. QBO calculates it by rolling prior-year net income into the Retained Earnings account at the start of each fiscal year. You shouldn't need to create journal entries to retained earnings — QBO handles this. If you see a "Net Income" line on the equity section, that's the current year's profit that will roll into retained earnings at year-end.
Common Mistakes
FAQ
Q: Can retained earnings be negative? A: Yes. If cumulative losses and distributions exceed cumulative profits, retained earnings goes negative — this is called an "accumulated deficit." It's common in early-stage startups that haven't yet turned a profit.
Q: What's the difference between retained earnings and owner's equity? A: Retained earnings is one component of owner's equity. Owner's equity also includes owner contributions (capital invested) and other items. Retained earnings specifically tracks accumulated profits minus distributions.
Related Terms
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Related Terms
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