Retained earnings are:

Retained earnings are:

• A. The cash reserves set aside to pay dividends
• B. An amount earned by a corporation and not yet distributed to shareholders
• C. A liability to suppliers
• D. A separate equity instrument

Answer: (B)

Retained earnings are the cumulative amount of profits a company has earned over time that haven’t been paid out as dividends. They’re essentially the owners’ claim on profits that stays invested in the business, not cash set aside or a liability. You’ll see them in the equity section of the balance sheet. They go up when the company reports net income and go down when dividends are paid or when there are losses. They aren’t an asset like cash, and they aren’t a separate debt or a stand-alone equity instrument. If you start with a beginning balance, add net income, then subtract dividends, you get ending retained earnings. If profits have exceeded distributions over time, retained earnings grow; if distributions exceed profits, they can shrink or become a negative balance (accumulated deficit).

Retained earnings are the cumulative amount of profits a company has earned over time that haven’t been paid out as dividends. They’re essentially the owners’ claim on profits that stays invested in the business, not cash set aside or a liability. You’ll see them in the equity section of the balance sheet. They go up when the company reports net income and go down when dividends are paid or when there are losses. They aren’t an asset like cash, and they aren’t a separate debt or a stand-alone equity instrument. If you start with a beginning balance, add net income, then subtract dividends, you get ending retained earnings. If profits have exceeded distributions over time, retained earnings grow; if distributions exceed profits, they can shrink or become a negative balance (accumulated deficit).