Calculation of Retained Earnings

Retained earnings if we talk of them in general way then the retained earnings of a company is the sum of the company's all earnings from last periods of the company's working from which all kind of deduction is done which include all kind of dividends that are paid to the company's shareholders.  The term "retained" refers to a crucial idea in accounting that describes that how all types of earnings are held by the corporation rather than distributed to shareholders as dividends. As we have read before that what is retained earnings, we can rather define them as the deduction of dividend payments then the company's retained earnings are its total net earnings and the profit they got or receive in their company duration.  Now this is kind of similar concept that is the company's retained earnings are less than the company may have suffer from loss  is not than the earning must be good and profitable enough for the company's welfare. Bascially, we can also say that as we calculate the owner's equity its somewhat kind of similar concept that it is also the left over amount to the company after all the debts are cleared with all the shareholders of the company.

The whole decision is upto the management of the company means they decides that the profit that is earned by the company must be distributed in the shareholders of the company or not. A business with an eye toward expansion may choose to employ retained earnings rather than paying any dividends at all or in very tiny sums.  The profits that are earned by the company are most of the time kept by the company rather than distributing them in the form of dividends to the shareholders of the company. All the retained earnings can also be used by any of the corporation or organization, in addition with some other reasons, to enhance the productivity of company, engage additional salespeople, launch new products in your corporation or you can also repurchase all your shares that you have lost because of bad times that you have seen in your business.  The ability of the corporation or an organization to reinvest their gained or net profit back into the firm or distribute them as dividends among the shareholders is all evidenced by the retained earnings, which plays a crucial factor in assessing the financial status of the company.  The following alternatives, which in general encompass all potential uses that a corporation or any organization might make of its extra money, can help you better grasp what retained earnings can tell you. For an instance, the first choice results in the earnings of money permanently disappearing from the company's books and records because dividend payments are final previously only.

All of the other choices keep the profits for their internal use or purpose, and these investments and all the funding activities are what are referred to as retained profits. Dividents payments from the income might be made to the company's owners or we can say shareholders of that company in full or in part. It can be used o hire more employees, salesperson or to enhance the capacity of the already existing or ongoing business operations, such as the production and manufacturing of the current items or the products for the sale. Any potential merger, acquisition, or collaboration that enhances business or corporation prospects may be funded using the funds of the company. Share buybacks are another application for it. Any loans or debts that the company may still owing can be repaid with the earnings they have earned previous with their business. Retained earnings in other words are also known as the earning surplus, which are also a kind of investments of the company or can say are reserves of the company used by the management of the corporation so that they can make new investments in their company's production.  As we have discussed above that it is up to the company that whether to distribute the profit or to keep it with themselves only. Since they are the actual proprietors of the corporation, the shareholders can, by a majority vote, overturn it. For many reasons that we don't know, because of this most of the companies decide to kept all the profit with them and not to distribute between the employees or the shareholders. The management may be considering a high growth project because they are more knowledgeable and more experienced about the market and the company's operations and may believe it has the potential to produce significant returns in the future.

As the management think according to the long run of the business. Over time, these measures might produce superior returns for the company's stakeholders than from the dividends payments.  Investors seeking short-term returns could also favour dividend payments that provide immediate gains. A business that prioritises growth may choose to use its retained earnings to fund operations like R&D, marketing, working capitals needs, capital expenditure and acquisitions in order to achieve more growth in their ongoing business or organisation. These kind of business or company's always choose to pay no dividends at all or very little in dividends. These kind of business have strong retained earnings over time in their business. 

Limitations of the Retained Earnings:-

The absolute amount of retained earnings for a given quarter or year might not offer any insightful data to an analyst. These only shows that how much more amount is added to the retained earnings of the

company over this period of time. The one who are eager to join hands with the company would want to know much more as an investors, such as the returns the retained earnings of the company till now, want to know whether they were superior to any of the alternative investments. Investors might also favours higher dividends over big yearly gains in retained earnings.

The retained earnings are calculated by adding net income to all the previous term's retained earnings and then subtracting any net dividend paid to the shareholders. So, from this you got an idea about the calculation of retained earnings of the company.

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