Retained earnings are the cumulative profits a company keeps after accounting for dividends and other distributions to shareholders. The statement of retained earnings provides a historical record of how that balance changed over a given period.
It begins with retained earnings at the start of the period, adds the company’s net income or subtracts its net loss, and then deducts dividends or distributions. The purpose of the statement is to show how much profit remained in the business rather than being distributed to owners.
This statement serves as a bridge between the income statement and the balance sheet. It helps the reader see how current-period profit or loss affected shareholders’ equity.
Key Takeaways
- Retained earnings meaning: The accumulated profit a company keeps after dividends and other shareholder distributions.
- Retained earnings formula: Beginning retained earnings + net income − dividends = ending retained earnings.
- Retained earnings appear within shareholders’ equity and do not represent cash available in the bank.
- A negative balance is called an accumulated deficit and can occur when accumulated losses exceed retained profits.
- For SaaS businesses, retained earnings should be reviewed alongside MRR, deferred revenue, unit economics and cash flow.
Retained Earnings Meaning
Retained earnings = cumulative profit kept by the company after dividends and other owner distributions.
Retained earnings are not cash. They are an equity balance representing accumulated profits that were not distributed. The related cash may have been used for inventory, equipment, software, real estate, debt repayment or other business needs. For a clearer distinction, see this guide to cash flow and cash flow statements.
For instance, if a company earns ₹1,00,000 in profit and invests those funds in equipment or business expansion, the profit can still contribute to retained earnings even though the company no longer holds the same amount in cash.
Additionally, retained earnings can be either positive or negative. If a business has maintained profitable operations throughout history, they will likely have positive retained earnings. Conversely, companies that lose money over long periods of time might find themselves with negative retained earnings (also called accumulated deficit).
What Is a Statement of Retained Earnings?
The retained earnings statement is one type of financial report that summarizes the total changes in retained earnings over a particular accounting period. This statement typically consists of:
- Beginning retained earnings
- Net income or net loss
- Dividends paid or declared
- Other adjustments as necessary
- Ending retained earnings
As such, the ending figure from this statement is typically transferred to the retained earnings line item on the balance sheet under shareholders’ equity. In some cases a company may present a separate statement of retained earnings, while in others it may be included in a more comprehensive statement of changes in stockholders’ equity
Ultimately, which method of presentation a company uses will depend upon both what their reporting obligations are and what accounting framework they adhere to.
Retained Earnings Formula
There are two formulas used to calculate ending retained earnings based on beginning retained earnings, net income or loss, and dividends:
Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends
Ending Retained Earnings = Beginning Retained Earnings − Net Loss − Dividends
Depending upon whether the company has a net income or net loss during the period, you add the net income or subtract the net loss.
If there is a prior-period adjustment, it may affect the opening retained earnings balance or comparative figures, depending on the applicable accounting framework.
The above simplified formulas work well for almost all general ledger and small business accounting applications.
Elements Used to Calculate Retained Earnings
Beginning Retained Earnings
Beginning retained earnings represent the closing retained earnings balance from the preceding accounting period. As mentioned previously, for a brand new company this number may be zero unless they have carried over an opening balance from a prior reporting period.
Net Income or Net Loss
Net income represents the operating profit earned by a business during an accounting period after subtracting operating expenses, interest payable, tax liability and other relevant charges from revenues. Net income causes retained earnings to increase.
Conversely, net loss decreases retained earnings.
Dividends
Dividends are amounts of profit that are paid to shareholders. When dividends are paid to shareholders, retained earnings decrease because these funds are no longer available for retention within the business. Dividends may be paid in either cash or stock, depending on corporate design and management choices.
Prior-Period Adjustments
Prior-period adjustments correct material errors relating to earlier reporting periods. Depending on the applicable accounting framework, the correction may restate comparative figures or adjust the opening balance of retained earnings rather than passing through the current-period income statement. The adjustment should be clearly identified and reported.
How to Prepare a Statement of Retained Earnings
To create a statement of retained earnings using basic information is relatively easy. Here are four simple steps:
- Step One: Identify beginning retained earnings from the previous period
- Step Two: Add current year net income or subtract net loss
- Step Three: Subtract all dividends and payments made during the current period
- Step Four: Compute the ending balance of retained earnings
At least two different methods exist for preparing a statement of retained earnings. Both begin with beginning retained earnings, end with ending retained earnings, and include net income or net loss, dividend payments and other adjustments as necessary
Retained Earnings Statement Example
| Particulars | Amount |
|---|---|
| Beginning retained earnings | ₹5,00,000 |
| Add: Net income | ₹2,00,000 |
| Less: Dividends | ₹75,000 |
| Ending retained earnings | ₹6,25,000 |
The company retained ₹1,25,000 of its current year profit after paying dividends. Its total accumulated retained earnings at the end of the year are ₹6,25,000.
Retained Earnings Example With a Net Loss
Suppose a company begins the year with retained earnings of ₹8,00,000. During the year, it reports a net loss of ₹1,50,000 and pays ₹50,000 in dividends.
Ending Retained Earnings = ₹8,00,000 − ₹1,50,000 − ₹50,000 = ₹6,00,000
A net loss reduces retained earnings because the business did not generate profit during the period.
Multi-Year Retained Earnings Example
Retained earnings accumulate over time. They are not limited to the profit generated during the current year.
Assume a company begins Year 1 with no retained earnings:
| Year | Net Income | Dividends | Ending Retained Earnings |
|---|---|---|---|
| Year 1 | ₹4,00,000 | ₹1,00,000 | ₹3,00,000 |
| Year 2 | ₹5,00,000 | ₹1,50,000 | ₹6,50,000 |
| Year 3 | ₹6,00,000 | ₹2,00,000 | ₹10,50,000 |
The Year 1 balance is calculated as: ₹0 + ₹4,00,000 − ₹1,00,000 = ₹3,00,000
The Year 2 balance is: ₹3,00,000 + ₹5,00,000 − ₹1,50,000 = ₹6,50,000
The Year 3 balance is: ₹6,50,000 + ₹6,00,000 − ₹2,00,000 = ₹10,50,000
This example shows how retained earnings can grow when a company continues to earn profits and retains a portion of them.
Retention Ratio
The retention ratio measures the percentage of net income that a company keeps after paying dividends. It is also called the plowback ratio.
The formula is: Retention Ratio = (Net Income − Dividends) ÷ Net Income × 100
For example, if a company earns ₹10,00,000 and pays ₹3,00,000 in dividends:
(₹10,00,000 − ₹3,00,000) ÷ ₹10,00,000 × 100 = 70%
The company retained 70% of its profit and distributed the remaining 30% to shareholders.
A higher retention ratio may indicate that a company is keeping more earnings for expansion, working capital, debt repayment or product development. However, the ratio should be considered alongside the company’s growth plans, cash flow, debt and dividend policy.
Retained Earnings vs Net Income
Retained earnings and net income are connected, but they represent different things.
Net income is the profit or loss generated during one accounting period. Retained earnings are the accumulated profits kept by the company over multiple periods after dividends and other distributions have been deducted.
| Point | Net Income | Retained Earnings |
|---|---|---|
| Meaning | Profit or loss for a specific period | Cumulative profit kept in the business |
| Time frame | Usually one month, quarter or year | Accumulated over multiple periods |
| Reported on | Income statement | Balance sheet and statement of retained earnings or changes in equity |
| Impact | Increases retained earnings when positive | Reflects profits retained after distributions |
| Reduced by dividends? | No, not directly | Yes |
| Can be negative? | Yes, as a net loss | Yes, as an accumulated deficit |
Simple Illustration
Suppose a company earns ₹3,00,000 in net income during the year and pays ₹1,00,000 in dividends. The ₹3,00,000 is the company’s current period net income. The amount added to retained earnings after the dividend is ₹2,00,000.
If the company already had ₹7,00,000 in retained earnings, its ending balance would be:
₹7,00,000 + ₹3,00,000 − ₹1,00,000 = ₹9,00,000
Retained earnings do not represent the amount of cash available in the bank account, because retained earnings represent the accumulation of profits which have been earned by the firm after distributions. Therefore, a company that has high levels of retained earnings could still have very little money in the bank account.
For example, a company could retain all of its profits over many years, but spend those retained profits on inventory, property, equipment, employee expansions, research and development, receivable collections, repaying loans, or purchasing other businesses.
Likewise, a company could have significant amounts of cash available from borrowed money or investments regardless of the level of retained earnings.
How Retained Earnings Connect to Other Financial Statements
The statement of retained earnings is an important financial statement that ties together the income statement and balance sheet. In general terms, here is how they tie together:
- Revenue and expense entries are made in the income statement.
- Net income or net loss is determined based on revenue and expense entries.
- Net income is added to retained earnings.
- Distributions such as dividend payments are subtracted from retained earnings.
The ending retained earnings balance appears as shareholders’ equity on the balance sheet.
The link between retained earnings and the financial statements allows users of the information to determine how a company’s current year profitability impacts its overall accumulated equity.
Where Are Retained Earnings Shown?
Typically, retained earnings will be located under shareholders’ equity on the balance sheet. The statement of retained earnings provides an explanation for how the retained earnings balance increased or decreased during the fiscal year.
Here is a common breakdown of what may appear under shareholders’ equity on the balance sheet:
- Share capital
- Additional paid-in capital or securities premium
- Retained earnings
- Other reserves
- Total shareholders’ equity
Assuming there are no adjustments related to this type of account, the ending retained earnings balance in the statement of retained earnings should reflect the exact same number as the retained earnings balance reflected on the balance sheet.
Why Is the Statement of Retained Earnings Important?
Stakeholders using the statement of retained earnings gain insight into where a company’s profits have gone. It illustrates how much of a company’s profit was kept for future use and how much was passed along to the investors as dividends.
This statement is also useful to management as a basis for evaluating whether the company has sufficient internal financing to support expansion, new equipment purchases, hiring, or development of new products.
Finally, investors can observe a company’s dividend policy through examining how much of each year’s profits are distributed and how much is retained for possible growth in the coming years. This statement links the net income from the income statement to shareholders’ equity on the balance sheet, and analysts use it to evaluate a company’s ability to generate profitability in prior periods while analyzing distributions to shareholders and reinvestments.
Common Uses of Retained Earnings
There are many reasons why a company may retain profits rather than distribute them to investors. Common uses include:
- Funding expansion into new markets
- Developing new products or technologies
- Hiring and training employees
- Supporting inventory and working-capital needs
- Repaying debt
- Funding acquisitions
- Building financial reserves
- Investing in research and development
Example: Retaining Profit to Fund Future Growth
A company generates ₹2,00,000 in net income during one year. Rather than distributing all of it, the company pays ₹50,000 in dividends and retains ₹1,50,000. Management may use the available cash to purchase equipment, hire employees, develop products, expand into a new market or repay debt. Retained earnings record the cumulative profit retained, while the actual deployment of cash is a separate capital-allocation decision.
When utilizing this approach, the company can document how it chose to allocate its profits between providing returns to its investors and funding potential future growth.
While retaining earnings may reduce reliance on external borrowing or new equity, retention is not always preferable to paying dividends. The decision depends on expected returns from reinvestment, growth plans, liquidity, the company’s capital structure and investor expectations.
Dividends, Drawings and Distributions
In general, dividends are subtracted from net income when determining retained earnings. Sole proprietorships and partnerships may treat owner withdrawals or drawings slightly differently, depending upon their respective legal structures.
A sole proprietorship may utilize an owner’s capital account to keep track of both an owner’s initial investment and subsequent withdrawals.
A partnership may typically utilise a partner’s capital accounts or current accounts to report the allocation of profits to individual partners as well as withdrawals made by individual partners per the terms of their respective agreements.
Accounting treatments vary by structure of ownership and applicable regulatory frameworks.
Retained Earnings by Legal Structure
Corporations
Corporations typically list retained earnings within shareholders’ equity. When dividends are issued to shareholders, they decrease retained earnings.
Sole Proprietorships
Sole proprietors may report their retained earnings somewhat differently than corporations. They tend to use owner’s capital accounts and drawings to report owner’s capital contributions and withdrawals.
Partnerships
Similar to sole proprietorships, partnerships typically use a partner’s capital accounts or current accounts to report a partner’s share of profits and withdrawals.
Private Companies in India
For Indian companies, retained earnings may be presented within other equity or the statement of changes in equity, depending on the applicable accounting framework and financial statement format.
The presentation may differ based on whether the company follows Indian Accounting Standards, Accounting Standards, or another applicable framework. Businesses should also consider statutory audit, board approval, shareholder reporting, and financial statement filing requirements.
Statement of Retained Earnings in India
For Indian companies, retained earnings are generally presented within other equity or the statement of changes in equity, depending on the applicable accounting framework and financial statement format. Schedule III of the Companies Act, 2013 refers to retained earnings as the surplus balance presented in the relevant column of the statement of changes in equity.
The exact presentation may vary based on the company’s legal structure, reporting framework, and financial statement requirements. Businesses should ensure that retained earnings are properly reconciled with the balance sheet and related equity disclosures.
What Retained Earnings Mean for B2B SaaS Companies
For a B2B SaaS company, retained earnings show the cumulative accounting profit kept in the business after shareholder distributions. They do not show whether subscription revenue is growing, whether renewals are healthy or whether the company has enough cash to fund the next quarter.
SaaS finance teams should review retained earnings alongside monthly recurring revenue, operating cash flow, burn rate and unit economics. A growing SaaS company may have negative retained earnings because earlier product-development and customer-acquisition costs exceeded accumulated profits, even when current recurring revenue is improving.
The distinction between retained earnings and deferred revenue is particularly important. Retained earnings are part of equity. Deferred revenue is a liability representing customer payments received before the related service has been delivered or recognised as revenue.
When SaaS businesses retain profit, the available resources may support product engineering, cloud infrastructure, security compliance, customer success, international expansion or go-to-market investment. Management should still evaluate whether the reinvestment is improving retention, margins and the underlying SaaS payment KPIs that protect recurring revenue.
Also Read: SaaS Billing Models: Flat-Rate, Per-User, Tiered and Usage-Based
How Payment Operations Support Cleaner SaaS Finance Data
Payment infrastructure does not calculate retained earnings, but it affects the accuracy and timeliness of the transaction data used by finance teams. Reliable recurring collections, settlement records and reconciliation data help teams connect invoices, customer payments, fees, refunds and bank credits before closing the books.
Cashfree’s recurring payment platform supports mandate-based subscription collections, while this guide to choosing a payment gateway for SaaS explains how recurring billing, recovery and cross-border support fit into the wider SaaS finance stack.
For platforms that want to offer payment capabilities within their own product, embedded payments can connect payment activity with the SaaS workflow. Indian software companies selling abroad should separately consider the collection, settlement and compliance requirements involved in accepting global SaaS payments.
For broader domestic collections, the Cashfree Payment Gateway supports payment acceptance across UPI, cards, net banking, wallets and other payment modes. These products support payment operations, while retained earnings continue to be determined through the company’s accounting records and financial statements.
Limitations of Retained Earnings
Retained earnings provide useful information, but they should not be viewed in isolation.
- They do not show the company’s cash balance.
- They do not guarantee that the company can pay dividends.
- They do not reveal how effectively retained profits were invested.
- A high balance does not necessarily mean strong current year performance.
- A negative balance does not always mean the company is currently failing.
Investors and managers should review retained earnings alongside cash flow, debt, profitability, assets, and business performance.
Common Mistakes When Calculating Retained Earnings
Confusing Net Income With Retained Earnings
Net income relates to one period, while retained earnings accumulate over time. They are not interchangeable.
Forgetting Dividends
Dividends must be deducted from retained earnings. Omitting them produces an overstated ending balance.
Ignoring Net Losses
A net loss must reduce retained earnings. It should not be treated as zero simply because there was no profit.
Using the Wrong Opening Balance
The beginning retained earnings figure should come from the previous period’s closing balance.
Treating Retained Earnings as Cash
Retained earnings are an accounting balance, not a bank account balance.
Failing to Account for Adjustments
Prior period corrections or changes in accounting treatment may affect retained earnings and should be considered where applicable.
Statement of Retained Earnings Template
You can use the following basic format:
| Particulars | Amount |
|---|---|
| Beginning retained earnings | ₹_____ |
| Add: Net income / Less: Net loss | ₹_____ |
| Less: Dividends | ₹_____ |
| Add/Less: Prior-period adjustments, if applicable | ₹_____ |
| Ending retained earnings | ₹_____ |
The final balance should be reconciled with the retained earnings figure shown in the balance sheet.
Industry and Reporting Notes
There is no standard retained earnings benchmark. The best amount will depend upon the company’s size (years of operation), type of business, profitability level, dividend payments, debt burden, and overall growth objectives.
For example, companies which continue to grow may keep all their earnings in order to build up funds for additional investments. Mature corporations could possibly pay out a higher proportion of their profits as dividends. In this case, retained earnings need to be examined together with profitability measures such as gross margin, operating cash flows, total debt levels, capital expenditures, and the corporation’s long range plan.
Conclusion
The statement of retained earnings describes the reasons for the change in a firm’s total profit reserves during a single accounting period. The retained earnings equation is as follows:
Ending retained earnings = Beginning retained earnings + Net income − Dividends
Net income indicates what was earned during a particular time frame. Retained earnings indicate what was left in the business from past profits, after taking into consideration dividends and other distributions.
Another important measure is the retention rate, which represents what percent of the current year’s net income was retained. Understanding retained earnings helps firms, investors, and finance departments make informed choices about dividend payments and determine where profits are going for future growth.
Build More Reliable Payment Operations for Your SaaS Business
Connect recurring collections, payment visibility and settlement data so your finance team can close the books with cleaner transaction records.
Talk to Our TeamFrequently Asked Questions
1. What are retained earnings?
Retained earnings are the cumulative profits a company has kept after subtracting dividends and other distributions to shareholders. They form part of shareholders’ equity.
2. What is the retained earnings formula?
The retained earnings formula is as follows: Ending retained earnings = Beginning retained earnings + Net income − Dividends.
3. How do you calculate retained earnings?
Calculate retained earnings starting with the last period’s ending retained earnings. Add net income for the current period or subtract the net loss for the current period. Then subtract the amount of dividends paid or declared during the period.
4. What is the difference between retained earnings and net income?
Net income is the profit or loss realized by a business during a specific accounting time frame. Retained earnings are the profits built up in the business over many accounting periods that remain in the business after paying dividends to stockholders.
5. Can retained earnings be negative?
Yes. When a firm has accumulated deficits exceeding the profits it earns during a given time frame, retained earnings will be negative. An accumulated deficit is also referred to as a deficit in retained earnings.
6. Are retained earnings an asset or cash balance?
No. Retained earnings are classified as part of shareholders’ equity. They cannot be considered a separate asset or a cash account.
7. Do dividend payments reduce retained earnings?
Yes. When dividends are distributed to shareholders, they reduce the amount of retained earnings in the business.
8. Can a company have high retained earnings but low cash?
Yes. If the company chooses to invest retained earnings in new assets such as inventory or accounts receivable, expand operations, pay down debt, or meet working capital needs, there would be little to no cash available at the end of each month.
9. What is the difference between retained earnings and reserves?
Retained earnings refer to accumulated profits remaining in the business after distributing some of those profits to shareholders. Reserves may be established for various reasons, including regulatory requirements or financing future projects. Reserves can be treated differently based on local laws, regulations, and accounting standards.
10. Where are retained earnings shown in Indian financial statements?
Generally speaking, retained earnings are reported either in other equity or in a statement of changes in equity, depending on whether the company reports according to Indian Accounting Standards, Accounting Standards, or another appropriate framework.
