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Retained Earnings: Definition and Meaning
Definition
Retained earnings are cumulative business profits retained in the company rather than distributed to owners, adjusted for prior losses and certain other items.
Why It Matters
Retained earnings are part of equity and reflect a business’s accumulated operating results over time. They may support working capital, growth, debt repayment, equipment purchases, and other business needs.
The relationship between retained earnings, distributions, taxes, and owner compensation depends on the business’s legal and tax structure. Owners should discuss those matters with qualified advisors.
Example
A company earns a profit and leaves it in the business to support growth rather than distributing the full amount to owners.
Related Terms
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