Glossary · Financial statements
Retained earnings
Retained earnings are the total profits a business has earned since it started, minus any losses and any dividends or distributions paid out. They are part of equity on the balance sheet. Each year's net income is added to retained earnings when the year is closed, so the balance carries the company's history.
Glossary / Retained earnings · Also called accumulated earnings, retained profits
How it works
Income and expense accounts measure one year at a time. When the year ends, their totals are moved into retained earnings, and they start the new year at zero. That is why the profit and loss resets each year but the balance sheet keeps going.
Retained earnings are not cash. A company can have large retained earnings and an empty bank account, because the profits may be tied up in equipment, inventory or receivables. For a sole proprietorship, accountants often fold profits into the owner's equity instead of keeping a separate retained earnings line.
Worked example: Rolling a year into retained earnings
A corporation starts 2026 with retained earnings of $85,000. It earns net income of $42,000 in 2026 and pays dividends of $15,000.
Retained earnings at the end of 2026 are $85,000 + $42,000 - $15,000 = $112,000. In January 2027 the income and expense accounts begin again at zero.
| Item | Amount |
|---|---|
| Opening retained earnings | $85,000 |
| Plus net income | $42,000 |
| Less dividends | -$15,000 |
| Closing retained earnings | $112,000 |
In the US and in Canada
In the United States
Dividends from a C corporation reduce retained earnings. S corporations and LLCs taxed as partnerships usually track owner distributions separately, and their tax returns report equity in their own way.
In Canada
Canadian corporations report retained earnings on the balance sheet in their T2 return's financial statements (the GIFI schedules). Dividends paid to shareholders reduce it and are reported on T5 slips.
In AcboBooks
The starter chart has a Retained Earnings account. Year-End Close posts closing entries that zero the year's income and expense accounts into Retained Earnings; the closing entries are excluded from the Profit & Loss but reflected on the Balance Sheet, and the close can be reversed.
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Updated October 25, 2026. General information, not tax, legal or accounting advice. Rules and rates change; check with the IRS, the CRA, your state or province, or your accountant.
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