Retained Earnings explained

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What is the meaning of the term retained earnings?

Where do retained earnings show up in the financial statements?

What makes retained earnings go up or down?

In this video we walk through the definition of retained earnings, analyze two real-life

examples of well-known companies to understand how retained earnings get accounted for, and

provide bonus tips above and beyond what other videos and textbooks would give you on things

you should know about retained earnings.

To retain means to keep, and earnings means profit.

Retained earnings is commonly defined as that part of a company's cumulative historical

profits that has not been distributed to shareholders through a dividend.

Retained earnings are one of the items that connect the income statement and the balance sheet.

The income statement, or profit and loss statement, is like a movie about profitability during

a period (usually a month, a quarter or a year).

The balance sheet, or statement of financial position, is like a picture at a point in

time (usually the end of a month, a quarter, or a year) of what a company owns and what it owes.

You start a new income statement at the start of every new year.

In order to "close out" the year, and make the balance sheet balance at the end of the

year, you add the profit that was made during the year to shareholder's equity.

Retained earnings is a component of equity, as we will see in the upcoming examples.

Why is retained earnings on the credit or right-hand side of the balance sheet?

Two ways to think about that.