This video shows how the Retained Earnings (and Accumulated Deficit) account changes over time.

Definition

Retained Earnings is a Stockholders’ Equity account that represents the accumulated profits since the company’s formation, minus any dividends that were distributed to the company’s shareholders.

How does Retained Earnings Work?

The Retained Earnings account is not the same as the Cash account, however. Retained Earnings increases when the company posts Net Income and decreases when it posts a Net Loss or declares Dividends. If the Retained Earnings account becomes negative, it is referred to as Accumulated Deficit. When a company has an Accumulated Deficit, this means the company’s past losses (and dividends distributed) exceed its past profits. Accumulated Deficit reduces the total Stockholders’ Equity of the firm.