Retained earnings accounting is the process of tracking and reporting a business’s accumulated retained earnings over time. When companies earn income from their operations, these profits are classified as “retained earnings.” This figure helps to inform potential investors of how much cash a company has at its disposal, as well as providing key insights into the overall financial health of the business.

The formula for retained earnings accounting is quite straightforward: it involves taking the previous period’s net income and subtracting any dividends that have been paid out in the current period. The result is the amount of retained earnings that the business currently holds. This amount is then reported on the company’s balance sheet, which gives an up-to-date snapshot of the company’s financial situation. By carefully tracking retained earnings over time, businesses can effectively plan for future growth and make wise decisions to maximize profits while minimizing risks.