Retained earnings
Retained earnings are the profits your business keeps to reinvest and build resilience over time.
June 2023 | Published by Xero
Published Wednesday 12 August 2026
Table of contents
Key takeaways
- Retained earnings are the cumulative profits your business keeps after paying owners, and they build up over time on your balance sheet.
- You calculate retained earnings by taking your previous balance, adding net profit after tax, and subtracting any payments to owners.
- Retained earnings can fund growth, cover slow periods, and reduce the need for external financing.
- Negative retained earnings signal accumulated losses, which is common for new businesses but worth monitoring.
What are retained earnings?
Retained earnings are the net profit your business keeps rather than paying out to owners. They accumulate over time as profits are reinvested back into the business.
How to calculate retained earnings
The formula for retained earnings is: previous retained earnings + net profit after tax − payments to owners. Here's how it works with a simple example.
- Start with your opening retained earnings: R100,000.
- Add your net profit after tax for the period: R50,000.
- Subtract any payments made to the owner: R20,000.
- Your closing retained earnings are R130,000.
How retained earnings affect the balance sheet
Owner's equity equals assets minus liabilities. Retained earnings are part of owner's equity, so when they grow, your equity grows too.
You'll find retained earnings in the equity section of your balance sheet. They also appear in the statement of changes in equity, which tracks how equity moves from one period to the next.
What are retained earnings used for
Retained earnings give your business flexibility. You can put them to work in several ways:
- fund day-to-day operations
- invest in growth, such as new equipment, additional locations, hiring, or marketing
- support research and development of new products or services
- buy out another business
- build a reserve to survive economic disruptions or slow periods
- accelerate debt repayments where it makes financial sense
Using retained earnings can reduce your reliance on external funding. If you're weighing up your options, explore different ways to finance your business.
Retained earnings versus profit and revenue
These terms are related but distinct. Revenue is your total income before any costs are deducted. Net profit is what remains after you subtract all costs and tax for a specific period.
Retained earnings, by contrast, are cumulative. They represent the total profit your business has kept after paying owners across all periods since you started trading.
What negative retained earnings mean
Negative retained earnings (sometimes called an accumulated deficit) occur when your cumulative losses and payments to owners exceed your cumulative profits. This pushes your retained earnings figure below zero.
It's common for new businesses to carry negative retained earnings while they're getting established. A negative balance is a signal to watch, but it isn't always cause for alarm if you have a clear path to profitability.
Rules, pros and cons for retained earnings
Retained earnings appear in the equity section of your balance sheet and in the statement of changes in equity. Some higher-risk or asset-heavy businesses may be required by law or lenders to retain a portion of their earnings.
There are clear benefits: retained earnings can fund growth and help you build a financial buffer against unexpected shocks. That resilience matters in South Africa where margins are tight. According to Statistics South Africa's Annual Financial Statistics, as analysed by the Bureau of Market Research, the average after-tax profit margin across all South African businesses was just 1.3% in 2024. When margins are that thin, retained earnings shrink, leaving less of a buffer.
On the other hand, holding too much cash in retained earnings can signal stagnation or inefficiency. Investors and lenders may question why profits aren't being reinvested or returned to owners. Keeping tabs on your retained earnings alongside other metrics is easier when you track performance with accounting reports.
Retained earnings for sole proprietors and partnerships
As a sole proprietor or partner, you typically draw money from the business as you need it. If your drawings exceed current earnings, you draw against retained earnings, which reduces them on your next balance sheet.
Because sole proprietors and partnerships can't sell shares, retained earnings are one of the main ways to grow owner's equity over time.
Grow your business with Xero
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FAQs on retained earnings
Here are answers to common questions about retained earnings.
Can a business have negative retained earnings?
Yes. Negative retained earnings occur when cumulative losses and owner withdrawals exceed cumulative profits. This is often the case for startups and isn't unusual in the early years.
Is it good to have high retained earnings?
Generally, yes, because it shows your business has consistently earned more than it's paid out. However, excessively high retained earnings with no clear reinvestment plan may raise questions about how efficiently the business is using its resources.
Where do retained earnings appear on the balance sheet?
Retained earnings sit in the equity section of the balance sheet, typically listed below share capital or owner's contributions.
Are retained earnings an asset?
No. Retained earnings are part of owner's equity, not assets. They represent accumulated profits kept in the business, but the actual cash or other resources those profits funded may be held as assets elsewhere on the balance sheet.
Are retained earnings the same as profit?
No. Profit refers to earnings for a single period, while retained earnings are the cumulative total of all profits kept in the business after owner payments across every period since inception.
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.