What is Retained Earnings, Function & How to Calculate It

The definition of retained earnings is retained earnings. Learn how to calculate, function, and examples of retained earnings to understand financial performance and strategy.

If you start to delve deeper into financial reports, one of the terms that often appears is retained earnings. Many people miss it, even though retained earnings can provide a clear picture of company growth. In accounting language, retained earnings are net profits that are not distributed as dividends, but are saved and reused for business needs.

The term sounds formal, but actually the concept is very close to everyday life. Come on, let’s discuss more deeply about what retained earnings are.

Also read: Overhead Costs: Components, Examples and How to Calculate Them

What is Retained Earnings?

In simple terms, retained earnings are the company’s remaining profits that are “retained” for certain purposes, for example business expansion, asset purchases, or working capital. In financial reports, retained earnings are located in the shareholders’ equity section of the balance sheet.

In Indonesia, another term for retained earnings is:

• Retained earning
• retain earning
• Retained earnings at the end of the period

So, retained earnings are not idle money. It is important capital to keep the company growing and competitive.

Why are Retained Earnings Important?

We often think of healthy companies that are diligent in paying dividends. In fact, retained earnings are an indicator of long-term financial strategy. For example:

✅ The company wants to expand to a new city
✅ Want to pay off bank loans
✅ Want to strengthen cash flow
✅ Want to develop new products
✅ Want to prepare for a recession

Even according to data BEI (Indonesian Stock Exchange)Many large issuers in Indonesia, such as banking, telecommunications, and FMCG (fast-moving consumer goods) choose to retain some of their profits because expansion requires large and stable capital.

For retail investors, the number reaches 11.7 million in 2024 According to KSEI, information like this is important for assessing company prospects.

Also read: EBITDA: Definition, How to Calculate, and Its Function in Business

Retained Earnings Is Not Net Profit, What’s the Difference?

This is one of the most common misconceptions. Many people think that retained earnings is net profit, but it is different.

Term	Explanation
Net income	Company profits after taxes & fees
Dividend	The share of profits distributed to shareholders
Retained earning	Profits are saved, not shared

So, retained earnings are the accumulated net profits that have not been distributed since the company was founded, not just profits from one period

Formula for Calculating Retained Earnings

Don’t worry, the formula is very simple:

Retained Earnings Earnings

Information:

• Initial retained earnings → last period balance
• Net profit → profit after tax
• Dividend → profits distributed to shareholders

This formula applies to both large and large companies MSMEs (Micro, Small and Medium Enterprises).

Also read: What is Leverage and How Does It Work

Example of Retained Earnings Calculation

For example, PT Finansi Mandiri has data like this:

• Initial retained earnings: IDR 1.2 billion
• Net profit for the year: IDR 600 million
• Dividends distributed: IDR 300 million

For:

IDR 1.2 billion + IDR 600 million – IDR 300 million = IDR 1.5 billion

This means that retained earnings are IDR 1.5 billion at the end of the period.

This figure shows the company’s ability to prepare internal funds for long-term needs.

Retained Earnings in Financial Reports: Where Are They Located?

If you check the annual reports of public companies, retained earnings usually appear in:

✅ Balance Sheet (Balance Sheet)

Shareholders’ Equity, along with paid-in capital & other reserves.

✅ Equity Change Report

Explains the movement of retained earnings, including net profit and dividends.

Studying this helps investors assess whether retained earnings is a long-term strategy or just a static number.

Also read: Account Payable is: Definition, Process and Benefits

What are the Functions of Retained Earnings?

There are many reasons companies choose to retain profits, for example:

1. 1. Business Expansion
      Open new branches, acquire companies, increase production capacity.
   2. Working capital
      Pay for operations, salaries, suppliers, and marketing costs.

• Debt Payment
  Increase the leverage ratio to make it healthier.

• Technology Investment & Research
  Especially for startups, fintech and pharmaceutical companies.

• Financial Reserves
  Anticipate a crisis, inflation, or decline in sales.

In other words, retained earnings are the foundation of business sustainability.

Factors Affecting Retained Earnings

The size of retained earnings is influenced by:

• Net profit level
• Company dividend policy
• Business models and industry cycles
• Expansion plans
• Macroeconomic conditions
• Capital structure

For example, startup companies often do not distribute dividends because retained earnings are their main source of growth.

Real World Example of Retained Earnings

• Telecommunications companies retain profits for investment in 5G network towers
• Retail companies use retained earnings to digitize cashier systems
• Manufacturing companies buy new machines to reduce production costs

Therefore, retained earnings do not always mean “idle money in the bank”.

Do MSMEs Need Retained Earnings?

The answer: absolutely necessary. Many MSMEs close not because they don’t sell, but because they don’t have cash reserves when sales fall.

So, retained earnings are the “business version of emergency funds”. Without it, the business becomes fragile.

Retained Earnings & Personal Finance Relationship

Interestingly, the concept of retained earnings can be applied to personal finance.

Your salary = net income
Savings & investments = personal retained earnings

The more you save, the stronger your financial position.

And if you are planning a home loan, vehicle or business capital loan, your credit history is also a consideration.

This is where Skorlife comes to help you:

• Check credit history legally & for free
• See more accurate credit approval opportunities
• Get insights to pay arrears & manage cash flow

So that your financial decisions remain safe, focused and confident.

Also read: What does Outstanding mean? Understanding and Influence on Cashflow

Common Mistakes When Reading Retained Earnings

❌ Assumes the number must always go up
❌ Mistaking retained earnings for cash
❌ Judge a company only by dividends
❌ Not reading the change in equity report

In fact, retained earnings are part of the big story of a company’s financial health.

Conclusion

In essence, retained earnings are retained earnings that the company saves for future needs, rather than distributing them as dividends. This concept is important for investors, business people, and anyone who wants to read financial reports more intelligently.

By understanding how to calculate retained earnings, its function, and examples of its application, you can assess whether a company has a solid growth strategy or not.

And if you also want to make sure your financial condition is strong, from credit history to loan approval opportunities, you can check via score life. Slowly, you can build a healthier and more planned financial foundation.

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FAQs regarding Retained Earnings

1. What is retained earnings in accounting?

Retained earnings are a company’s net profit that is not distributed as dividends, but is saved for business needs such as expansion, investment or working capital. In Indonesia, retained earnings are often called retained earnings or retained earnings.

2. What is the company’s purpose in holding retained earnings?

The goal is for the company to have an internal source of funding—without having to go into debt or issue new shares. These funds can be used for research, buying assets, paying debts, and facing difficult economic conditions.

3. Is retained earnings the same as net profit?

No. Net profit is the profit for one period, while retained earnings is the accumulated net profit that has not been distributed since the company was founded. So, retained earnings are the result of a collection of previous profits.

4. Where is retained earnings found in financial statements?

Retained earnings are in the equity section of the balance sheet and are explained in more detail in the report on changes in equity. Investors usually monitor its movements to assess the company’s strategy.

5. Is retained earnings always good for investors?

Not always. Retained earnings are useful if they are used productively and increase company value. But if funds are simply held without direction, investors may prefer dividends. Therefore, it is important to look at the business context.