What is retained earnings in balance sheet?

Retained earnings to which account belongs

Undistributed profits are part of the reserves and are part of the calculated result, after taxes, which are not distributed in dividends, but will remain in the company.

The distribution of the profit or self-financing will depend on the company’s policy, since the internal financing of the company will present great advantages for companies that have problems when seeking external financing due to the lack of guarantees.

As understood in this article, retained earnings are closely linked to reserves and more specifically to voluntary reserves, since it is a type of profit that is not distributed because the company voluntarily decides not to distribute them and to keep them as part of the company for different actions.

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Retained earnings asset or liability

Retained earnings correspond to the company’s profits or dividends that remain in the company, that is, they are not distributed among its partners or shareholders. Companies may decide to keep them to achieve various objectives, such as internal growth.

They can be a relevant source of financing that does not involve bank interest costs and other related expenses (commissions, etc.). When used appropriately, they can increase the value of the company in the short term.

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They are also considered a measure of a company’s value and stability. The greater the amount of retained earnings, the more likely it is that the company has performed well over time and will pay dividends to its partners or shareholders in the near future.

Retained earnings are calculated by subtracting expenses from revenues (thus obtaining the net profit). Then, the dividends actually paid to the shareholders are subtracted. The remaining balance will be retained earnings.

What are retained earnings

Retained earnings correspond to the company’s profits or dividends that remain in the company, that is, they are not distributed among its partners or shareholders. Companies may decide to keep retained earnings to achieve various objectives, such as internal growth.

They can be a relevant source of financing that does not involve bank interest costs and other related expenses (commissions, etc.). When used appropriately, they can increase the value of the company in the short term.

They are also considered a measure of a company’s value and stability. The greater the amount of retained earnings, the more likely it is to pay dividends to its partners or shareholders in the near future.

Retained earnings are calculated by subtracting expenses from revenues (thus obtaining the net profit). Then, the dividends actually paid to the shareholders are subtracted. The remaining balance will be retained earnings.

Retained earnings on the balance sheet

In relation to the criteria for the classification of transactions according to their credit risk, it is appropriate to highlight their conformity with the definitions of non-performing exposures (“non-performing”) and restructured or refinanced exposures (“with forbearance measures”) included in the European regulation for the preparation of supervisory financial information known as FINREP [the Implementing Regulation (EU) no. No. 680/2014 of the Commission of 16 April laying down implementing technical standards regarding supervisory reporting by institutions in accordance with Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013].

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Within the changes introduced in this circular and emanating directly from the amendments to IFRS 9, three of them should be highlighted. The first consists of the aforementioned change in the impairment model for financial assets, which is no longer based on the loss incurred but on the expected loss. The purpose of this change is to achieve a more appropriate valuation of assets and a more timely recognition of their impairment.