What are Retained Earnings?

Retained Earnings are that part of the profits of an organisation, which remains with it after meeting all its operating expenses and paying out dividends to all the shareholders. The organization intends to keep this surplus amount with itself in the form of reserves and surplus to meet any contingency, carry out research work, expansion projects, etc.

Usually, the profits earned by a business are distributed as dividends among its shareholders. However, a business may decide not to distribute all of its profits to its shareholders in the form of dividends, instead, it keeps a portion of the net income for future use. This method of raising funds using own profits by a firm is called retained earnings or ploughing back of profits. This method of raising funds serves as a means of internal funding, self-financing, or profit-sharing. It is a hassle-free method of raising funds since the firm does not have to depend upon any external sources. It is to be noted that the amount of profit that can be reinvested in a company depends upon the earnings made by the company during a particular year, the dividend policy adopted by the firm and the company’s age.