Definition
Retained earnings are the cumulative net profit of a business that has not been distributed to shareholders as dividends. They are presented as a component of equity on the balance sheet and updated each period as the net profit (or loss) from the income statement closes into them. Over time, retained earnings reflect the accumulated wealth-building of the business that has stayed inside the company rather than flowing out to owners.
What retained earnings mean in practice
For a bookkeeper, retained earnings are the running total of every period’s net profit minus every dividend paid since the business was incorporated. Each year-end, the closing net profit on the P&L moves into retained earnings as part of the year-end close. Each dividend paid during the year reduces retained earnings on the date of payment. The closing retained-earnings balance is what appears in the equity section of the balance sheet.
The retained-earnings figure tells a reader something important about the history of the business. A high balance (relative to share capital and to current-year profit) signals a long-established profitable business that has chosen to retain rather than distribute earnings. A negative balance signals accumulated losses that have exceeded all prior profits. A balance that swings between positive and negative across years signals an unstable or seasonal business.
A practical example: a UK consultancy at 31 March 2027. Opening retained earnings (1 April 2026): 60,000. Net profit for the year: 62,250. Dividend paid in February 2027: 20,000. Closing retained earnings: 60,000 + 62,250 - 20,000 = 102,250. This figure is the retained-earnings line in the equity section of the closing balance sheet and is the closing line in the retained-earnings column of the statement of changes in equity.
How retained earnings work by country
United Kingdom
UK GAAP calls retained earnings the “profit and loss account” under FRS 102, a legacy term inherited from older UK GAAP. The distributable reserves rules under Companies Act 2006 section 830 mean only realised profits in this account can be paid as a dividend. Unrealised gains (typically revaluation reserves) sit separately and cannot be distributed until the underlying asset is sold and the gain is realised.
Australia
Retained earnings increase by net profit and decrease by dividends paid, in the standard pattern. The peculiarity of AU dividend law is that distributions are restricted by the Corporations Act section 254T solvency test, not by the size of retained earnings per se. A company can pay a dividend even with low or negative cumulative retained earnings if the solvency test is met and the directors are satisfied the payment is fair and reasonable to shareholders as a whole.
Canada
Retained earnings are the key input into the eligible vs non-eligible dividend categorisation that determines the shareholder’s personal tax rate. The General Rate Income Pool (GRIP) tracks corporate income taxed at the general rate, available for eligible dividends. The Low Rate Income Pool (LRIP) tracks corporate income taxed at the small-business rate, available for non-eligible dividends. The CRA enforces this categorisation strictly: a dividend paid from the wrong pool produces an additional tax assessment.
New Zealand
Retained earnings are tracked alongside the Imputation Credit Account (ICA), which records the corporate tax paid by the company. When a dividend is paid, it carries imputation credits up to the ICA balance, which the shareholder uses to offset their personal tax on the dividend. The system avoids double taxation provided the imputation credits keep pace with the dividends declared.
Singapore
Retained earnings can be distributed as dividend only if the underlying profits are realised. Singapore operates a one-tier corporate tax system: corporate income tax is final, and shareholders pay no further personal tax on franked dividends. This contrasts with the UK and AU classical-system elements, where dividends generate additional personal tax at the shareholder level (subject to allowances).
Related terms
Retained earnings sit at the core of the equity section:
- Retained profit is the everyday UK synonym.
- Equity is the wider balance-sheet section retained earnings belong to.
- Net profit is what closes into retained earnings each year.
- The balance sheet presents the closing retained-earnings line.
- The statement of changes in equity walks through every movement in retained earnings during the period.
- A dividend is the main way retained earnings decrease.
See also
For the SOCIE that explains every movement in retained earnings, see the statement of changes in equity entry.
FAQ
See the answered questions above for the source of retained earnings, the distinction from cash, and dividend rules with negative retained earnings.