A company's balance sheet shows a snapshot of the company's finances at any given time: the assets, liabilities and owner's equity. The retained earnings on a balance sheet represent the profits made (or, in the case of a negative balance, the losses) by the company that are not distributed to the shareholders. The retained earnings amount fluctuates as money comes into and goes out of the business.
Factors that Affect Retained Earnings
Retained earnings go up when a company's income exceeds its expenses. For example, if a company brings in $1 million in income and has $900,000 in expenses one year, the retained earnings increase by $100,000. However, retained earnings decrease if the company has a net loss. In addition, retained earnings decrease for dividends paid out to shareholders. For example, if a company has $100,000 in retained earnings and pays $60,000 in dividends to the shareholders, the company's retained earnings decreases to $40,000.
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