What’s this ‘retained earnings’ we hear often talked about? It’s retained, that is it’s kept unused for a period of time, that’s for one, but what does it comprise of? What is being retained?
Your company’s earnings essentially are what you’ve left as a profit (or a loss) into your company, i.e. you haven’t taken them out in the form of dividends (and cash as the opposite of the accounting entry you’d make). Retained earnings are accumulated over time starting from the date you commenced with your business, i.e. from the date you made your first entry onto your income statement. As it is, a retained earnings is not just accumulated profits, but also accumulated losses your business has made over a period of time.
Retained earnings live a life of their own in the sense that reporting period’s results are just added to the amount after each period and the only other changes that would occur are dividend payments. Yes, there are other types of entries that could occur to the retained earnings, however they’re connected to not so regular situations, i.e. options, restructurings etc.
As it is, keeping a line item called Retained earnings within your equity normally means just having one entry happening into it once a year.