Definition of Retained Earnings
Usually, retained earnings consists of a corporation’s earnings since the corporation was formed minus the amount that was distributed to the stockholders as dividends. In other words, retained earnings is the amount of earnings that the stockholders are leaving in the corporation to be reinvested.
The amount of retained earnings is reported in the stockholders’ equity section of the corporation’s balance sheet.
Are Retained Earnings an Asset?
While the amount of a corporation’s retained earnings is reported in the stockholders’ equity section of the balance sheet, the cash that was generated from those retained earnings is not likely be in the company’s checking account. Instead, the corporation likely used the cash to acquire additional assets in order to generate additional earnings for its stockholders. In some cases, the corporation will use the cash from the retained earnings to reduce its liabilities. As a result, it is difficult to identify exactly where the retained earnings are presently.
One can get a sense of how the retained earnings have been used by studying the corporation’s balance sheet and its statement of cash flows.
