What is Retained Earnings?
Retained earnings are the cumulative net income earned by a business since inception, less all dividends declared, representing the portion of profits reinvested in the company rather than distributed to shareholders.
How It Works
- Formula: opening retained earnings + net income – dividends declared = closing retained earnings.
- Reset by stock dividends, prior-period error corrections, and changes in accounting policy.
- Negative retained earnings (accumulated deficit) indicate cumulative losses exceed profits.
- Source of dividend distributions, but legal reserves must be funded first.
Saudi Context
Under the Saudi Companies Law, retained earnings can only be distributed as dividends after the legal reserve has been funded and any accumulated losses absorbed. If accumulated losses reach 50% of share capital, the board must call an extraordinary general assembly to decide on continuing operations or recapitalizing.
Example
A Saudi company opens the year with SAR 12,000,000 in retained earnings, earns SAR 5,000,000 net profit, and pays SAR 2,000,000 in dividends. Closing retained earnings = 12,000,000 + 5,000,000 – 2,000,000 = SAR 15,000,000.