Retained Earnings
Definition
Retained earnings is the cumulative net income a company has earned over its life, minus all dividends paid out. It sits within shareholders' equity on the balance sheet and is the main link between the income statement and the balance sheet: each period, ending retained earnings equals beginning retained earnings plus net income minus dividends.
It is an accounting balance, not a pot of cash — a company with large retained earnings may hold little cash if profits were reinvested in assets or used for buybacks (buybacks typically reduce equity through treasury stock, though conventions vary).
Negative retained earnings (an accumulated deficit) is common at young, loss-making companies and is not by itself a solvency problem.
Why interviewers ask
Retained earnings is the plug that makes three-statement walk-throughs balance — if net income falls by $6 after tax, retained earnings (and thus equity) falls by $6, offsetting asset-side changes. The trap is treating retained earnings as spendable cash, or forgetting to run net income through it when balancing the balance sheet.
Related terms
Interviews don't test definitions — they test recall under pressure.
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