Retained earnings
Learn what retained earnings are, how to calculate them, and how Singapore dividend rules apply.
June 2023 | Published by Xero
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- Retained earnings are the profits your business has kept after dividends or drawings, and they sit in shareholders’ equity on your balance sheet
- You calculate them as opening retained earnings plus net profit (or minus a net loss) minus dividends paid
- Retained earnings are an equity figure, so check your bank balance separately to see how much cash you hold
- Singapore companies can pay dividends only out of profits, and one-tier dividends aren’t taxed again in shareholders’ hands
Retained earnings definition
Retained earnings are the profits your business has kept over its life after paying dividends or owner drawings. You’ll also see them called accumulated profits or retained profits.
On your balance sheet, they sit in the equity section. For a private limited company, that’s shareholders’ equity; for a sole proprietor, it’s owner’s equity.
Think of the balance as a running tally of profit you’ve chosen to keep. Each profitable year you don’t fully pay out adds to it. The money itself may sit in the bank or work in equipment and stock.
Retained earnings formula and how to calculate them
The formula adds this period’s result to last period’s balance, then takes away what you paid out. Here’s how it looks:
Retained earnings = opening retained earnings + net profit (or − net loss) − dividends paid
Each part of the formula has a specific meaning:
- Opening retained earnings are the balance carried over from the end of the last period
- Net profit is your profit for the current period after all expenses and taxes, and a net loss reduces the total instead
- Dividends paid are the amounts distributed to shareholders during the period
- Closing retained earnings are the result, which becomes next period’s opening balance
Worked example
Say your private limited company starts the year with an opening balance of S$50,000. During the year, it earns S$30,000 in net profit and pays S$10,000 in dividends.
Retained earnings = S$50,000 + S$30,000 − S$10,000 = S$70,000
Your closing balance is S$70,000. That’s the profit your company has built up and kept, ready to reinvest or hold as a buffer.
How to prepare a statement of changes in equity
Many qualifying Singapore small entities can choose to report under the Singapore Financial Reporting Standard (SFRS) for Small Entities, which is based on the International Financial Reporting Standard (IFRS) for SMEs. That framework requires a statement of changes in equity, and you can build its retained earnings column in five steps:
- Start with the opening balance from last year’s closing balance sheet
- Add the year’s net profit, or subtract a net loss, once closing entries from your trial balance have moved it into equity
- Subtract the dividends declared to shareholders during the year
- Apply any prior-period adjustments, such as corrections to errors from earlier years
- Carry the closing balance forward to your balance sheet and next year’s opening figure
What affects retained earnings
Your balance moves each period for a handful of reasons. Knowing them helps you plan how much profit to keep:
- Net profit adds to the balance, while a net loss reduces it
- Dividend payments to shareholders reduce the balance directly
- Owner drawings reduce equity in sole proprietorships and partnerships, the same way dividends do for companies
- Prior-period adjustments that correct past accounting errors can raise or lower the balance
Over the longer term, your business’s age plays a part, because newer businesses have had fewer profitable years to build a balance. Your dividend policy matters too, since it sets how much profit you reinvest and how much you distribute.
Retained earnings vs reserves and cash
Retained earnings are an equity figure that tracks kept profit, and the cash behind that profit may already be spent on equipment or loan repayments. Some companies also split the balance into two parts:
- an appropriated portion, which directors set aside for a named purpose such as buying premises or repaying a loan
- an unappropriated portion, which stays available for dividends or general business use
Appropriating profit is a bookkeeping label, so no money moves. To hold real funds for a future purchase, keep them in a separate bank account and match them to the appropriation in your books.
Retained earnings vs net income and revenue
These three figures are linked, but each measures a different stage of your results. Reading them side by side shows how sales turn into profit you keep.
Retained earnings vs net income
Net income, also called net profit, is your profit for a single period, such as a quarter or a year. It’s what’s left after you subtract all expenses and taxes from that period’s revenue.
The kept-profit balance is cumulative: it adds up net profit across every period, minus dividends or drawings. Net income is what you earned this year, and retained earnings are the running total you’ve kept since the business started.
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.
To work down from revenue, you subtract all expenses and taxes to reach net profit, then subtract dividends or drawings. Revenue can be high while kept profit stays low if your costs or payouts are large.
Retained earnings and dividends in Singapore
In Singapore, section 403 of the Companies Act 1967 says a company can pay dividends only out of profits. Your retained earnings balance shows directors the company’s accumulated profit before they declare a dividend.
Singapore also uses a one-tier corporate tax system, where company profits are taxed at a flat 17% corporate rate. One-tier dividends paid by a Singapore resident company aren’t taxable for shareholders.
Because profits are taxed once at company level, keeping profits as retained earnings doesn’t add another layer of tax. That leaves you free to decide between reinvesting and paying out based on your growth plans and your shareholders’ needs.
Negative retained earnings
A negative balance happens when your accumulated losses and payouts are larger than your accumulated profits, a position known as an accumulated deficit. It usually comes from one of these causes:
- Operating losses sustained over several periods
- Large one-off expenses, such as a lawsuit settlement or equipment write-off
- Dividends or drawings that exceed what the business has earned
- Heavy start-up costs in the early years of a new business
An accumulated deficit can make banks more cautious about lending, and it may limit the dividends your company can pay. Many start-ups run at a loss for their first few years while they build a customer base. The direction of the trend tells you more than one year’s figure.
How to interpret retained earnings
Your balance says a lot about financial health, but it needs context. A single figure makes the most sense when you read it alongside your business’s stage and recent investments.
A high balance usually points to steady profit and a habit of reinvesting. It puts you in a strong position to expand, hire or ride out a downturn.
Low or negative balances can be normal for young businesses or those that have just made large investments. Pair the trend with profitability ratios such as net profit margin to see whether a falling balance comes from weaker margins or from bigger payouts.
What are retained earnings used for?
Kept profit lets you fund your business’s future without borrowing or bringing in new investors. You can use them to:
- top up working capital to cover payroll and rent during slow months
- buy equipment or open a new location
- develop and test new products or services
- acquire a competitor or complementary business
- build an emergency reserve for unexpected disruptions
- pay down loans early to cut interest costs
- buy back shares from shareholders who want to exit, as long as the company stays solvent
That buffer matters most when trading conditions tighten, because you can keep operating without taking on new debt. A healthy balance also helps when you do borrow, as lenders look closely at your equity position.
How retained earnings affect the balance sheet
The balance sits in the shareholders’ equity section and is one of the main drivers of your business’s net worth. Among your financial statements, the statement of changes in equity shows how the balance moved during the year.
The balance sheet equation links equity to everything else you own and owe:
Shareholders’ equity = assets − liabilities
Kept profit increases equity in two ways:
- It adds assets, such as extra cash or stock bought with profit
- It reduces liabilities, such as a loan paid down with profit
Spending kept profit later moves value between assets without changing equity. If you use S$10,000 of cash to buy new equipment, cash falls by S$10,000 and equipment rises by the same amount.
The other way to grow equity is new investment, such as issuing shares. Sole proprietors can’t issue shares, so kept profit is their main way to build owner’s equity.
Retained earnings for sole proprietors and partnerships
If you run a sole proprietorship or partnership in Singapore, your business profit is reported as part of your personal income each year. Unlike a private limited company, you don’t need to declare a dividend to access your business profits.
Instead, you take drawings, which reduce your owner’s equity on the next balance sheet. Here’s how drawings affect your books and your tax:
- You move money from the business account for personal use
- Your owner’s equity falls by the amount you withdraw
- Your drawings and your own salary are not deductible business expenses, so they don’t lower your taxable profit
- You pay personal income tax on your full business profit, however much you withdraw
Tracking drawings carefully gives you an accurate picture of what the business can afford. A tax adviser can help you plan withdrawals around your personal tax bill.
Track and manage retained earnings with Xero
Knowing this figure helps you decide how much profit to reinvest and how much to pay out. Xero keeps your equity position current with automated bank feeds and balance sheet reports, so you can see where you stand at any time. Choose a plan today and get one month free.
FAQs on retained earnings
Here are quick answers to common questions about retained earnings.
Is retained earnings the same as cash in the bank?
No. To see your actual cash, look at the cash and bank lines under current assets or at your cash flow statement.
Are retained earnings the same as share capital?
No. Share capital is the money shareholders paid for their shares, while kept profits build up separately; both sit in shareholders’ equity.
Can retained earnings be used to buy back shares?
Yes, a company can use accumulated profit to repurchase its own shares, which reduces shareholders’ equity. Check the Companies Act 1967 requirements and your company’s constitution with your accountant before you proceed.
Are retained earnings an asset?
No, they’re part of equity, on the opposite side of the balance sheet equation from assets. The profit they track is usually held in assets such as cash or equipment.
Is it good to have high retained earnings?
Generally yes, as long as you put the profit to work. A large balance with no clear plan may prompt shareholders to ask for higher dividends.
Can you take money out of retained earnings?
Company owners usually take money out as dividends, which reduce the balance directly. A director’s salary works differently: it’s a business expense that lowers profit before any of it is kept.
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.