Retained earnings
Retained earnings are the profits your business keeps. Learn how to calculate them and the rules for PTs in Indonesia.
June 2023 | Published by Xero
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- Retained earnings are the net profits your business keeps instead of paying out. Indonesian financial statements list them as saldo laba or laba ditahan.
- To calculate them, add net profit to your opening balance, then subtract dividends. The total sits in equity on your balance sheet.
- If you run a PT, company law shapes how you set aside profit and pay dividends. Sole proprietors track owner capital and drawings instead.
- Kept profit can fund growth and debt repayment without outside finance. A growing balance also shows lenders your business is consistently profitable.
Retained earnings definition
Retained earnings are the net profits your business has kept over time instead of paying them out to owners. In Indonesian financial statements, you’ll see them listed as saldo laba or laba ditahan.
They sit in the equity section of your balance sheet, next to the capital owners have put in. Each year you make a profit and don’t pay it all out, the balance grows and adds to your owner’s equity.
Think of retained earnings as a running tally of the profit your business has kept since day one. Say your café in Bandung makes a profit for five years and you leave half in the business each year. The tally shows that kept half.
Retained earnings formula and how to calculate them
The formula takes your opening balance, adds what you earned and subtracts what you paid out. Here it is:
Retained earnings = beginning retained earnings + net profit (or − net loss) − dividends paid
To calculate your ending balance for a period, follow these steps:
- Find your beginning balance, which is the closing figure from last period’s balance sheet
- Add your net profit for the period, or subtract a net loss if you made one
- Subtract any dividends paid to shareholders or drawings taken by owners
- Record the result as your ending balance, which becomes next period’s starting point
Here’s how those steps work with real numbers.
Worked example in rupiah
Say your small business starts the year with a balance of Rp500,000,000. During the year, you earn Rp300,000,000 in net profit and pay Rp100,000,000 in dividends.
Retained earnings = Rp500,000,000 + Rp300,000,000 − Rp100,000,000 = Rp700,000,000
Your ending balance is Rp700,000,000. That’s the profit your business has built up and kept, ready to reinvest or hold as a financial cushion.
How retained earnings affect the balance sheet
This balance sits in the equity section, so it feeds straight into your business’s net worth. The accounting equation shows how: equity = assets − liabilities.
When your business earns a profit and keeps it, your assets grow, usually as cash, and your kept profit grows by the same amount. That keeps both sides of the balance sheet equal.
Say you keep Rp100,000,000 of profit and later spend it on new equipment. Your cash falls by Rp100,000,000 and your equipment rises by the same amount, so total assets and equity stay level.
The other way to lift equity is bringing in new capital, such as issuing shares in a company. For sole proprietors, who can’t issue shares, kept profit is the main way equity grows over time.
In Indonesia, private entities without public accountability prepare their reports under Standar Akuntansi Keuangan Entitas Privat (SAK EP). According to the Indonesian Institute of Accountants (IAI), SAK EP took effect on 1 January 2025, replacing SAK Entitas Tanpa Akuntabilitas Publik (SAK ETAP).
Your balance sheet shows the figure at one point in time, while your other core reports explain how that figure changed. One report tracks the movement directly.
Statement of changes in equity
The statement of changes in equity (laporan perubahan ekuitas) shows how each equity item moved during the period, including saldo laba. Corporate Finance Institute describes the statement of retained earnings as an equation: it starts with the opening balance, adjusts for net profit and dividends, then shows the closing balance.
In Indonesia, you’ll usually find this movement as the saldo laba line within the laporan perubahan ekuitas. It gives you and your accountant a clear record of where each year’s profit went.
Retained earnings rules for PT companies in Indonesia
If you run a perseroan terbatas (PT), or limited liability company, company law shapes what you can do with kept profit. Under Law No. 40 of 2007 on Limited Liability Companies (UU 40/2007), a PT must:
- set aside part of its net profit each financial year as a mandatory reserve (cadangan wajib) while saldo laba is positive (Article 70)
- keep adding to that reserve until it reaches at least 20% of issued and paid-up capital (Article 70)
- let the general meeting of shareholders (Rapat Umum Pemegang Saham, or RUPS) decide how net profit is used, including dividends (Article 71)
- pay dividends only when saldo laba is positive, meaning current profit has covered losses carried from earlier years (Article 71)
For example, a PT with Rp1,000,000,000 in issued and paid-up capital needs a reserve of at least Rp200,000,000. Once the reserve reaches that level, the shareholders can decide how to use the rest of the profit.
Retained earnings themselves aren’t taxed, and Indonesian dividend tax depends on who receives the payout when a PT distributes profit:
- resident individuals pay a 10% final income tax, unless they reinvest the dividends in Indonesia within a specified period
- domestic corporate shareholders generally receive dividends tax-free
- non-resident shareholders pay 20% withholding tax, which a tax treaty may reduce
These rules make keeping profit in a PT a planning decision as well as an accounting one. A tax adviser can help you time dividends to suit your shareholders.
What affects retained earnings
Kept profit moves up or down each period for a handful of reasons. Knowing them helps you plan how much profit to keep.
The main factors are:
- net profit, which adds to the balance, or a net loss, which reduces it
- dividends paid to shareholders, which lower the balance
- owner drawings (prive) in a sole proprietorship or partnership, which work like dividends
- prior-period adjustments that correct accounting errors from earlier years
Longer-term factors matter too. A newer business usually has a smaller balance because it’s had fewer profitable years, and seasonal trade can make the figure swing. Your dividend policy, meaning how much you pay out versus reinvest, sets how fast the balance grows.
Negative retained earnings
Negative retained earnings mean your accumulated losses are larger than your accumulated profits. Accountants also call this an accumulated deficit.
Common causes include:
- operating losses over several periods
- large one-off costs, such as writing off equipment
- dividends or drawings that exceed what the business has earned
- heavy start-up costs in the early years
A negative balance can make banks more cautious about lending, though it’s common for young businesses building a customer base. For a PT, it also puts dividends on hold until profit covers the losses, under Article 71 of UU 40/2007.
How to interpret retained earnings
Your retained earnings say a lot about your business’s health, but they need context. The figure makes most sense next to your business’s stage, industry and recent investments.
A high, growing balance usually signals steady profit and reinvestment in growth. A low or negative balance can worry lenders, though it’s normal for young businesses or after a big investment.
The trend over several years tells you more than any single figure. Read it alongside your profitability ratios, including one ratio that links kept profit directly to earnings.
Retention ratio
The retention ratio shows the share of net profit you keep in the business. Corporate Finance Institute calculates the retention ratio as net profit minus dividends, divided by net profit.
Retention ratio = (net profit − dividends) ÷ net profit
Using the worked example, (Rp300,000,000 − Rp100,000,000) ÷ Rp300,000,000 gives a retention ratio of about 67%. A higher ratio means more profit stays to fund growth, while a lower one means more goes to owners.
What are retained earnings used for?
Kept profit lets you invest in your business’s future without borrowing or seeking outside funding. You decide where the money goes.
Common uses include:
- covering payroll, rent and supplies during slow periods
- buying equipment, opening new locations or hiring staff
- researching and testing new products or services
- buying competitors or complementary businesses
- building cash reserves for unexpected disruptions or economic downturns
- paying down loans early to cut interest costs
Paying down debt also improves your gearing ratio, the balance between borrowed money and equity. A healthy equity position can help you qualify for better loan terms when you do need to borrow.
Retained earnings vs net profit, revenue and cash flow
These four figures are linked, but each measures something different. Knowing the gaps between them helps you read your reports with confidence.
Retained earnings vs net profit
Net profit is your profit for one accounting period, such as a quarter or a year, after all expenses and taxes. Retained earnings are cumulative: they add up every period’s net profit, minus dividends or drawings, since the business began.
Put simply, net profit is what you earned this year, and retained earnings are the running total you’ve kept. The next comparison starts further up the chain.
Retained earnings vs revenue
Revenue is the total money your business brings in from sales before any expenses. It’s the top line on your profit and loss statement.
Starting with revenue, you subtract costs and taxes to reach net profit, then subtract dividends or drawings. That’s why revenue can be high while kept profit stays low if your costs or payouts are large.
Retained earnings vs cash flow
Retained earnings are an accounting record of profit kept over time. That profit may already be tied up in equipment, stock or unpaid customer invoices. A large balance can sit alongside a small bank balance.
Cash flow tracks the money actually moving in and out of your bank account. Watching both figures shows you whether your profit is turning into cash you can spend.
Retained earnings for sole proprietors and partnerships
Sole proprietorships and partnerships in Indonesia record kept profit differently from a PT. If you run a usaha dagang (UD), persekutuan komanditer (CV) or firma, your equity usually sits in owner capital (modal) and drawings (prive).
Profit you leave in the business adds to your modal. You can take money out for personal use without a shareholder vote or formal dividend decision.
Here’s what happens when you take drawings:
- your prive account records the amount you withdraw
- your owner capital falls by the same amount on the next balance sheet
- your business cash goes down, so timing matters for cash flow
- your profit for the year stays the same, because drawings aren’t a business expense
As a UD owner, you pay tax on business profit as personal income, and Government Regulation No. 20 of 2026 (PP 20/2026) sets these rules from 22 April 2026:
- individuals with turnover up to Rp4.8 billion a year can use the 0.5% final income tax rate
- individuals can now use that rate with no time limit
- single-owner PT Perorangan companies and domestic cooperatives can also use it within the same turnover limit
- newly registered CVs, firmas and PTs can’t use the 0.5% rate and pay the standard corporate income tax rate instead
Tracking your drawings carefully gives you an accurate view of your business’s position. A tax adviser can confirm which rate applies to you.
Track retained earnings with Xero
Knowing your kept profit helps you decide how much profit to reinvest and how much to pay out. Up-to-date figures make that call easier.
With Xero, automated bank feeds keep your numbers current, and you can run balance sheet and profit and loss reports whenever you need them. Try Xero and get one month free to see your equity position clearly. With clear numbers in front of you, planning your next investment gets simpler.
FAQs on retained earnings
Here are quick answers to common questions from Indonesian business owners.
Are retained earnings an asset?
They belong in the equity section of your balance sheet. The profit they record is held in assets such as cash, stock or equipment, so a large balance may not mean money in the bank.
Are retained earnings taxed?
Keeping profit in the business creates no tax bill of its own. The profit was already subject to income tax in the year you earned it. Further tax only arises on dividends, so the timing of payouts is worth planning with your tax adviser.
Does a PT have to pay dividends?
Not always. Under UU 40/2007, profit left after the mandatory reserve goes out as dividends unless the RUPS decides to keep it in the business.
Is it good to have high retained earnings?
Usually, yes, because a high balance shows consistent profit. If most of it sits as idle cash, you could put some towards growth or pay it out to owners.
Can you take money out of retained earnings?
Yes, a PT pays kept profit out as dividends, while a sole proprietor takes drawings. Either way, you need enough cash on hand, because the figure itself records profit and holds no money.
How do you recover from negative retained earnings?
Each profitable period shrinks the deficit, so improving margins and pausing dividends or drawings speeds up recovery. New capital from owners lifts total equity, but only future profit clears the deficit itself.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.