RETAINED EARNINGS represent the portion of a business’s profits that remain in the company rather than being paid out as dividends… While they can increase with profitability, various factors can also cause them to decrease.
LET’S SEE SOME CASES!
1. Net Losses
When expenditures exceed revenue, a net loss occurs, leading to a reduction in retained earnings
2. Higher Dividend Payments
Distributing dividends which are higher than net profit reduces the amount of income that is retained
Besides net losses given by the main business operation (which is the typical case) or dividend payments higher than net profit, we may also find the case of…
3. Extraordinary Losses
which are one-time events like lawsuits or natural disasters that can result in a large expense, decreasing retained earnings
or also…
4. Asset Write-Downs
If assets are found to be overvalued, a write-down will decrease net income, affecting retained earnings.
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