Accounting for retained earnings is the process of tracking and calculating the portion of a company’s profit that is reinvested back into the business instead of being distributed as dividends to shareholders. For instance, if a company earns $1 million in profit and pays out $500,000 in dividends, the remaining $500,000 would be considered retained earnings.
Retained earnings are crucial for a company’s long-term growth and financial stability. They can be used to finance capital projects, research and development, or acquisitions. Retained earnings have also played a significant role in the development of accounting practices, particularly in the area of financial reporting.