Retained Earnings

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What are Retained Earnings?

Retained Earnings are accumulated profits that are not paid out as dividends to the shareholders. They are kept to accumulate as working capital. They may or may not be reinvested in the business. On the balance sheet they are accounted for as Ownership Equity.

A firm may decide to retain profits for basically two reasons:

1. It believes it has good investment opportunities (offering better returns than the market).

2. There are tax benefits to be expected from postponing dividend payout.

Also called Earned Surplus or Undistributed Profits. See also: Retention Ratio.

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