Retained Earnings: Key Insights into Their Legal Definition and Importance

Q: What are retained earnings?

Retained earnings are the portion of a company&#039;s profit that is retained for reinvestment or to pay off debt, rather than distributed as dividends.

Q: How are retained earnings calculated?

Retained earnings are calculated by taking the previous period&#039;s retained earnings, adding net income, and subtracting any dividends paid.

Q: Are retained earnings considered an asset?

Retained earnings are not considered a liquid asset but are part of the shareholders&#039; equity on the balance sheet.

Definition & Meaning

Retained earnings refer to the portion of a corporation's net income that is kept in the company after dividends are paid to shareholders. This amount is typically reinvested back into the business for growth, used to pay off debts, or held for future needs. Retained earnings are reported in the shareholders' equity section of the balance sheet and are also detailed in the statement of retained earnings. Other terms for retained earnings include earned surplus and accumulated earnings.

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Legal Use & context

In legal practice, retained earnings are relevant in various contexts, particularly in corporate law and family law during divorce proceedings. For example, retained earnings can be considered nonmarital assets in divorce cases, depending on the circumstances. Users can manage related forms and procedures with the help of legal templates available through US Legal Forms.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

For instance, a corporation may choose to retain earnings to fund a new product line instead of distributing those earnings as dividends to shareholders. In a divorce case, if one spouse owns a corporation, the retained earnings may be evaluated to determine the overall value of the business and how it impacts asset division. (hypothetical example)

State-by-state differences

Examples of state differences (not exhaustive):

State	Consideration of Retained Earnings
California	Retained earnings may be considered community property if accumulated during the marriage.
New York	Retained earnings are often treated as separate property unless they were reinvested in marital assets.
Texas	Retained earnings are typically considered separate property unless proven otherwise.

This is not a complete list. State laws vary and users should consult local rules for specific guidance.

Comparison with related terms

Term	Definition	Key Difference
Retained Earnings	Net income retained in the business after dividends.	Focuses on income reinvested rather than distributed.
Dividends	Payments made to shareholders from profits.	Dividends are distributed, while retained earnings are kept.
Accumulated Earnings	Total earnings retained over time.	Accumulated earnings can include past retained earnings.

Common misunderstandings

What to do if this term applies to you

If you are dealing with retained earnings in a business context or a divorce proceeding, consider reviewing your financial statements and consulting with a financial advisor or attorney. Users can explore US Legal Forms' ready-to-use legal form templates to assist with related documentation. If the situation is complex, seeking professional legal help may be necessary.

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Quick facts

Retained earnings are reported in the shareholders' equity section of the balance sheet.
They can impact business valuation in legal disputes.
Understanding retained earnings is essential for corporate governance and financial planning.