- Retained earnings are the cumulative after-tax profits a company keeps in the business rather than paying out as dividends.
- They are calculated as opening retained earnings plus net profit minus dividends paid, and sit in the equity section of the balance sheet.
- The underlying profit is taxed at the company rate first, and further tax can apply to shareholders when profits are distributed as dividends.
Retained earnings is a phrase that shows up on every company balance sheet, yet it is rarely explained in plain terms. Strip away the jargon and it means something simple: the profit you have kept in the business rather than paid out. For a company owner deciding whether to reinvest or take a dividend, understanding this line is genuinely useful. This guide covers what retained earnings are, the formula with an Australian example, where they appear, and the tax angle that matters here. If you are still setting up, company registration is where the equity structure behind all this begins.
What are retained earnings?
Retained earnings are the cumulative after-tax profits a company keeps in the business rather than paying out to shareholders as dividends. They appear in the equity section of the balance sheet and are calculated as opening retained earnings plus net profit minus dividends paid. In Australia the underlying profit is first taxed at the company tax rate, 25% for base rate entities or 30% otherwise in 2025 to 2026, and further tax may apply to shareholders when profits are later distributed as dividends.
The word “cumulative” is the key. Retained earnings are not this year’s profit alone; they are the running total of every year’s kept profit, built up (or drawn down) over the life of the company. This is a company concept, tied to the equity that a Pty Ltd structure creates.
How do you calculate retained earnings? The formula with an AU example
The retained earnings formula is short:
Opening retained earnings + net profit after tax − dividends paid = closing retained earnings
Here is an illustrative example. Suppose a company starts the year with A$120,000 of retained earnings and earns A$100,000 profit before tax. Company tax at the 25% base rate entity rate is A$25,000, leaving A$75,000 of after-tax profit. The owners take A$25,000 as dividends and keep the rest.
| Item | Amount (A$) |
|---|---|
| Opening retained earnings | 120,000 |
| Net profit after tax | 75,000 |
| Dividends paid | (25,000) |
| Closing retained earnings | 170,000 |
The company kept A$50,000 of this year’s profit, lifting retained earnings from A$120,000 to A$170,000. The figure that flows into this formula, net profit after tax, comes straight from your profit and loss statement.
TIPRetained earnings and cash are not the same thing. A company can show large retained earnings and still be short on cash if that profit is tied up in equipment, stock or unpaid invoices.
Where do retained earnings appear on the balance sheet?
Retained earnings sit in the equity section of the balance sheet, alongside share capital. Together they make up shareholders’ equity, the owners’ share of the business once liabilities are subtracted from assets.
Share capital is the money shareholders originally put in. Retained earnings are the profits the company has added on top over time. As the business earns and retains profit, this line grows, which is one reason equity tends to build up in a healthy company year after year.
Retained earnings vs profit vs dividends: what’s the difference?
These three are related but distinct, and mixing them up leads to poor decisions.
| Term | What it is | Timing |
|---|---|---|
| Profit | Earnings for a single period | This period only |
| Retained earnings | Cumulative profit kept in the business | Running total to date |
| Dividends | Profit paid out to shareholders | When declared |
Profit is a period figure from the P&L. Dividends are the slice of profit paid out to shareholders. Retained earnings are what is left after dividends, accumulated across every year. Dividends are the direct counterpart to retention: every dollar paid out is a dollar not retained, a trade-off explored further in dividends and distributions.
Are retained earnings taxed in Australia?
This is the question owners ask most, and the short answer is that the profit behind retained earnings is taxed before it is ever retained. The following is general information, not tax advice.
A company pays tax on its profit at the company tax rate, 25% for base rate entities or 30% otherwise in 2025 to 2026, according to the ATO. Retained earnings are what remains after that tax, so they are after-tax money. There is no separate, additional tax simply for keeping profit in the company.
Tax can arise again when profits are distributed. When a company pays a dividend from retained earnings, shareholders may pay tax on it, though Australia’s franking credit system is designed to account for company tax already paid. Because the outcome depends on each shareholder’s circumstances, this is an area to confirm with a registered tax accountant rather than rely on a general rule.
What do negative retained earnings mean?
Negative retained earnings, sometimes called accumulated losses or an accumulated deficit, mean a company has lost more over its life than it has earned, or has paid out more than it has made.
This is common and not always alarming. Many startups run accumulated losses for years while they invest ahead of profit. It becomes a concern when losses persist without a path back to profitability, since it erodes equity and can affect a company’s ability to pay dividends or raise finance. Reading the trend over several years matters more than a single negative figure.
Why do retained earnings matter to owners, lenders and investors?
Retained earnings tell different readers different things, which is why the line gets attention.
For owners, they represent funds available to reinvest in growth without borrowing or raising new capital. For lenders, healthy and growing retained earnings signal a business that generates and keeps profit, which supports a finance application. For investors, the trend shows whether the company is building value or distributing it all out. You can find related explainers in the accounting and tax resources hub.
How Sleek helps you keep your equity accounts right
Retained earnings, dividends and franking are straightforward to explain and easy to record incorrectly, especially at year end. Sleek runs company accounting on Xero, keeping your profit, equity and retained earnings accounts accurate across the year so the numbers are right when you decide whether to reinvest or distribute.
That means you head into year-end and dividend decisions with clean books and an accountant who can walk you through the options for your situation.
Get company accounting that keeps your equity accounts accurate, with fixed-fee plans from A$275 a month
Fixed-fee company accounting from A$275 a month, keeping profit, equity and retained earnings accurate all year.
Illustrative figures are examples only and are not tax advice. Prices may vary with current promotions, check the latest on the relevant page.
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Frequently Asked Questions
What are retained earnings in simple terms?
Retained earnings are the profits a company has kept in the business instead of paying them out to shareholders as dividends. They build up year after year, so the figure is a running total of all past profit that has been retained.
Are retained earnings taxed in Australia?
The profit behind retained earnings is taxed at the company rate first, 25% for base rate entities or 30% otherwise in 2025 to 2026, so retained earnings are after-tax money. There is no separate tax just for keeping profit in the company, though tax can apply to shareholders when profits are later paid out as dividends. This is general information, so confirm your position with a registered tax agent.
What is the difference between retained earnings and profit?
Profit is what a company earns in a single period, shown on the profit and loss statement. Retained earnings are the cumulative total of profit kept in the business across all periods, after dividends. One is a snapshot of a period; the other is a running total.
Can I pay retained earnings out as dividends?
A company can generally distribute retained earnings to shareholders as dividends, provided it meets the requirements in the Corporations Act and can still pay its debts. Because dividend decisions carry tax and solvency implications, they are worth planning with your accountant.
What do negative retained earnings mean?
Negative retained earnings, or accumulated losses, mean the company has recorded more losses or distributions over time than profit. It is common in early-stage businesses investing ahead of profit, but persistent losses erode equity and can limit dividends and borrowing.
Do sole traders have retained earnings?
No. Retained earnings are a company concept, because they describe profit kept in a separate legal entity rather than paid to shareholders. A sole trader’s profit belongs to them personally, so it is recorded as owner’s equity, less drawings, rather than retained earnings.
Where do retained earnings appear in financial statements?
Retained earnings appear in the equity section of the balance sheet, alongside share capital. The net profit that feeds them each year comes from the profit and loss statement, which links the two reports together.
