Retained earnings, a brief explanation

Retained earnings refer to the capital formed through the production and operation activities of listed companies, that is, the accumulation of net income from operations.

After deducting the income tax paid according to national regulations, the profits of listed companies are net profits. Net profits can be distributed among the company's owners in accordance with agreements, contracts, company articles of association or relevant regulations. They can be used as investment income of the company's owners, or they can be used to expand the company's strength for additional investment; or for the purpose of offsetting losses with profits or making advance arrangements. For preparation considerations, etc., a part of it is left without distribution. The net profit left behind is consistent with the attributes of the funds invested by the company's owners. They are all shareholders' equity and are counted as retained earnings in accounting terms.

Retained earnings belong to shareholders’ equity, and shareholders can arrange distribution. This part of retained earnings with designated uses is called "surplus reserve". Therefore, retained earnings can be divided into two categories: surplus reserves and undistributed profits.

(1) Surplus reserve refers to the accumulated funds that the company withdraws from net profits in accordance with regulations.

(2) Undistributed profits refer to undistributed net profits, which have two meanings: first, this part of the profits is not distributed to the company’s investors; second, this part of the net profits has no designated use.

Investors should know that whether the surplus reserve of a listed company is used to cover losses or to increase capital ("bonus shares"), it is only used in different categories of items that belong to the same shareholders' equity. Mutual conversion, such as the company's transfer of shares, not only reduces the surplus reserve, but also increases the paid-in capital. This mutual conversion does not affect the increase or decrease in total shareholders' equity. "Undistributed profits" has a credit balance on the balance sheet, which reflects the company's existing but undistributed profits; if the balance is on the debit side, it reflects the company's uncompensated losses.