Retained earnings
Retained earnings is the cumulative total of net profits a business has kept rather than paid out as dividends. It is reported as a component of equity on the balance sheet.
Also known asaccumulated profit
What it is
See it move
A waterfall chart opens at opening retained earnings of €140,000, adds a positive step of +€72,000 for net income earned in the period, then deducts €25,000 for dividends paid to shareholders, arriving at closing retained earnings of €187,000. The chart shows that retained earnings grow with profitable trading and shrink with distributions, representing the cumulative net profits the business has reinvested since its inception.
The formula
Variables
- Closing retained earnings (€)
- Opening retained earnings (€)
- Net income for the period (€)
- Dividends paid during the period (€)
If you trained under a national GAAP
DE · HGBWhere national-GAAP intuition diverges from the international standard
HGB (German)
HGB applies a strict prudence principle (Vorsichtsprinzip) and a conservative realisation rule, so annual profit flowing into retained earnings is systematically lower than under IFRS. Broader asset write-downs are mandatory, and gains that IFRS would hold in a separate OCI reserve simply do not arise or are not recognised at all. There is no Other Comprehensive Income mechanism under HGB, so all profit-or-loss items channel through the income statement.
IFRS
Under IFRS, retained earnings accumulate net income measured under more permissive recognition criteria — capitalised development costs, fair value uplifts, and progressive revenue recognition each tend to increase annual profit compared with an HGB equivalent. IFRS equity also holds a separate OCI reserve for items such as revaluation surpluses and actuarial remeasurements of defined-benefit pension obligations; those items do not pass through retained earnings directly, but they increase total equity. An IFRS-restated retained earnings balance is therefore typically materially higher than the HGB Gewinnrücklagen figure for the same entity.
Edlintics’ own explanatory summary — not official IFRS Foundation or national standard-setter guidance.
Check yourself
A company begins the year with retained earnings of €95,000, earns net income of €48,000, and pays dividends of €20,000. What are the closing retained earnings?