WHAT ARE RETAINED EARNINGS & HOW ARE THEY IMPACTED WITH DIVIDEND PAYOUT?

Retained earnings, crucial for accounting, represent a business's accumulated profits over time. While many entrepreneurs rely on bookkeepers to manage and calculate retained earnings, it's important for business owners to understand these terms. Knowing about retained earnings is essential for analyzing the financial status of the company.

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1. WHAT ARE RETAINED EARNINGS & HOW ARE THEY CALCULATED?

Retained earnings are the profits kept by a business after paying dividends to owners. In These earnings fluctuate with losses or gains. Management decides whether to reinvest the earnings in the business for new assets or projects, often with guidance from the bookkeeper. Entrepreneurs use this information to assess expansion possibilities. Retained earnings, also called accumulated earnings, are crucial for investors and lenders to evaluate a business's viability. It is calculated as follows:

Retained Earnings = Beginning Period Retained Earnings + Net Income or Loss – Dividends

The starting retained earnings, also known as beginning period retained earnings, represent the earnings carried over from the previous accounting period. For instance, if a company had $100,000 as retained earnings from the prior period, and in the current period, it earned a net income of $60,000 while paying out $20,000 in dividends, the retained earnings for this accounting period would be calculated as: $100,000 + $60,000 – $20,000 = $140,000.

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2. IMPACT OF DIVIDEND PAID ON RETAINED EARNINGS.

Dividends, whether in cash or stocks, result in a decrease in accumulated earnings for a business. When cash is paid out, the bookkeeper records it, reducing the asset value in the balance sheet for the organization. Similarly, issuing stocks to shareholders lowers the per-share valuation of the company, impacting retained earnings in both scenarios.

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3. HOW TO INTERPRET RETAINED EARNINGS?

Retained earnings, managed by bookkeepers, persist from one accounting period to the next throughout a business's lifespan. Profitable businesses show increasing accumulated earnings, while struggling ones may have negative retained earnings, indicating higher debt than income. Bookkeepers analyze these figures over the long term to gauge the capital accumulating as retained earnings. While negative retained earnings are common for startups relying on loans and investors, businesses operating for several years should ideally have positive retained earnings. In cases with many shareholders receiving regular dividends, the business may have lower retained earnings. Seasonal businesses experience varying retained earnings, with sales periods showing positive figures and dry spells exhibiting negatives.

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