RetainedEarningsAccumulatedDeficitRetained earnings are the total profits a company has earned since it began that it has kept in the business instead of paying out to shareholders as dividends. When cumulative losses and distributions exceed cumulative profits, the balance turns negative and is reported as an accumulated deficit.
Retained earnings are a component of stockholders' equity, not a pile of cash. The earnings they represent may have been spent long ago on equipment, acquisitions, debt repayment, or share buybacks.
Regulation S-X Rule 5-02.30 requires retained earnings to appear as its own caption within stockholders' equity, separate from additional paid-in capital and accumulated other comprehensive income, and split between appropriated and unappropriated amounts where applicable. After a quasi-reorganization, the rule also requires the company to show the date from which the new retained earnings balance runs. In XBRL the balance is tagged RetainedEarningsAccumulatedDeficit, and a deficit is reported as a negative value.
The balance changes each period by net income or loss attributable to the parent, less dividends declared on common and preferred stock. Other items can also pass through it directly, including the cumulative effect of adopting certain new accounting standards, some stock dividends, and, at some companies, the portion of a share repurchase price recorded when shares are retired rather than held in treasury. The statement of stockholders' equity reconciles these movements.
A long record of rising retained earnings shows that a company has been profitable and has reinvested part of those profits. The balance is not directly comparable across companies, though: a firm that pays out most of its earnings or buys back large amounts of stock can have modest or even negative retained earnings while being highly profitable. Many young growth companies show large accumulated deficits simply because they have not yet reached cumulative profitability. Analysts often look at retained earnings relative to total equity or total assets as one measure of how self-funded a company is.
A: Beginning retained earnings plus net income for the period, minus dividends declared, gives ending retained earnings. Certain other adjustments, such as the effect of adopting new accounting rules, can also be recorded directly in the balance.
A: No. Retained earnings are an equity account that tracks accumulated profits kept in the business. The cash those profits generated may have been reinvested or spent.
A: Yes. Losses in earlier years, large dividends, or share buybacks charged against retained earnings can leave an accumulated deficit even at a company that is profitable today.
In the metrics library: Retained Earnings Growth
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