retained earnings

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Retained Earnings are the accumulated profits of a corporation that are not paid out as dividends. That is, the amount of retained earnings is arrived at by adding net income (or loss) to retained earnings from the beginning of the accounting period and then subtracting cash and stock dividends. Also referred to as accumulated earnings or earned surplus. The earnings are either reinvested in existing business operations; used to fund new projects, mergers or acquisitions; used for share buybacks; or used to pay off outstanding debt. The positioning of the business may influence whether they keep more retained earnings or not. More stable companies with shareholders who prefer dividends may allocate more of their profit to dividends than to retained earnings. Growth-focused companies may allocate more of their profits to retained earnings to fund new projects or to pay off higher levels of debt.

[Last updated in December of 2020 by the Wex Definitions Team]