The cumulative net income a business has kept rather than distributing as dividends to owners. Appears in the equity section of the balance sheet and grows over time as the business profits.
Understanding Retained Earnings
Retained earnings represent the cumulative net income a business has earned over its entire lifetime, minus any amounts distributed to owners as dividends or draws. It appears in the equity section of the balance sheet and grows each period the business is profitable.
The retained earnings formula is: Beginning Retained Earnings + Net Income − Dividends/Draws = Ending Retained Earnings. A business that has been profitable over time will show a large positive retained earnings balance, while a business with cumulative losses will show a negative balance (called an accumulated deficit).
Retained earnings are not the same as cash — they represent the total profits that have been reinvested in the business over time, which may have been used to purchase inventory, equipment, or other assets. A company can have high retained earnings but low cash if profits were reinvested in growth.
Why It Matters for Ecommerce
For ecommerce business owners, retained earnings represent the equity you've built through profitable operations. If you're seeking a business loan or looking to sell your business, retained earnings signal financial strength and sustainability. Negative retained earnings (accumulated deficit) is a red flag for lenders and buyers.
Practical Example
Your ecommerce business started 3 years ago. Year 1 net income was -$5,000 (loss), Year 2 was +$15,000, Year 3 was +$25,000. You took $10,000 in owner draws over 3 years. Retained earnings = -$5,000 + $15,000 + $25,000 - $10,000 = $25,000. This $25,000 is the equity you've built through operations.
Related Terms
Balance Sheet
A financial statement that reports a company's assets, liabilities, and equity at a specific point in time. The fundamental equation is Assets = Liabilities + Equity.
AccountingNet Income
Total revenue minus all expenses, taxes, and costs — the "bottom line" of the income statement. Represents the actual profit a business earns after all deductions.
AccountingFiscal Year
A 12-month period a company uses for financial reporting and tax purposes, which may or may not align with the calendar year. The chosen fiscal year affects when financial statements are prepared.
Put This Knowledge Into Practice
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