What is Retained Earnings?
Nexa Consultancy | Startup & Finance Glossary
Retained Earnings represent the cumulative net income of a company that is retained and reinvested in the business, rather than being distributed to shareholders as dividends. It is a component of Shareholders' Equity on the balance sheet.
For Startups: For most startups, which are in a high-growth phase and typically unprofitable, the retained earnings balance will be negative. This is referred to as an "accumulated deficit" and is perfectly normal. It reflects the cumulative losses incurred while investing in growth. As the startup becomes profitable, the retained earnings will become positive.
Calculation: Retained Earnings (Ending) = Retained Earnings (Beginning) + Net Income - Dividends.
Example: A company starts the year with ₹50 Lakhs in retained earnings, earns a net income of ₹10 Lakhs, and pays no dividends. Its ending retained earnings are ₹60 Lakhs.