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3 things: Revenue, Expenses and Dividends.
Retained Earnings is part of Equity. Equity is the "worth" of the company and of the owners. (Which are stockholders in this case.) So earnings increases that worth. i.e. it's what the company is in business to do. But expenses reduce that back down, so that decreases it. For a corporation, the equity is split into several pieces, and Retained Earnings is where we put earnings. It would generally be done by using the net income (revenues - expenses) and then just adding the net income to Retained Earnings. Then dividends are what is being paid back out to the owners (stockholders). Those dividends must come from current or prior earnings. Since that is in retained earnings, those dividends will come out of retained earnings and reduce it. |
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