Which Transactions Affect Retained Earnings?

Doing so will ensure that your company uses its earnings efficiently and maintains the right balance between growth and profitability. By subtracting dividends from net income, you can see how much of the company’s profit gets reinvested into the business. Retained earnings is the cumulative amount of earnings since the corporation was formed minus the cumulative amount of dividends that were declared. Retained earnings is the corporation’s past earnings that have not been distributed as dividends to its stockholders.

Retained earnings are the amount of money a company has left over after all of its obligations have been paid. Retained earnings are typically used for reinvesting in the company, paying dividends, or paying down debt. Stockholders’ equity includes retained earnings, paid-in capital, treasury stock, and other accumulative income.

Example of a Cash Dividend

Those using accounting software will have their retained earnings balance calculated without the need for additional journal entries. The higher the retained earnings of a company, the stronger sign Bookkeeping for Solo and Small Law Firms of its financial health. Negative retained earnings are a sign of poor financial health as it means that a company has experienced losses in the previous year, specifically, a net income loss.