What is retained earnings? Calculation formula and effective management method

Retained profits are an important accounting indicator that helps businesses increase stock value, reinvest and expand business. In the article below, let's immediately learn with 1C Vietnam what the concept of retained profits is and how to manage retained profits effectively.

1. What is retained earnings?

Retained Earnings is the remaining amount after paying taxes, distributing dividends to shareholders and deducting losses from the gross profit of the business in a certain period of time. This is an important part of equity at the end of the accounting period, often used to pay debts, pay dividends to shareholders or reinvest to promote business development.

Retained profits from the time the business began operating are recorded in the "Equity" section of the balance sheet, specifically index 421 - Undistributed after-tax profits. Businesses should note that there will be a clear distinction between retained profits from previous years and retained profits from the most recent business period.

2. Formula to calculate retained earnings

Retained earnings are calculated according to the following basic formula:

Retained profits at the end of the period = Retained profits at the beginning of the period + Net income (Net loss) arising during the period - Dividends paid during the period

In there:

• Retained profit at the beginning of the period: Accumulated profit balance at the beginning of the period
• Net income arising during the period: The amount of profit after tax (Loss) is calculated by subtracting total expenses in that period from total revenue
• Dividends paid during the period: Dividends must be paid to shareholders who contribute capital in cash or shares

For example: The company has an after-tax profit in 2024 of 5,000,000 VND and decides to pay dividends to shareholders with a total value of 2,000,000 VND. Cumulative retained earnings until the end of 2023 is VND 6,000,000. To calculate cumulative retained earnings until the end of 2024, managers use the following formula:

Retained profits in 2024 = Profit after tax - Dividends = 5,000,000 - 2,000,000 = 3,000,000 VND.

So, the accumulated retained profits until the end of 2024 are: Accumulated retained profits until 2023 + Retained profits in 2024 = 6,000,000 + 3,000,000 = 9,000,000 VND.

3. Meaning of retained profits for businesses

Retained profits play an important role in financial management and sustainable development of businesses. Here is what retained earnings means for a business:

• Reinvestment: Retained profits provide capital to invest in new projects or expand business operations. At the same time, businesses can use retained profits to upgrade infrastructure, develop new products, or research and develop technology.
• Overcoming risks and financial difficulties: Retained profits help businesses face sudden challenges, overcome risks and overcome financial difficulties. This amount of money can help businesses maintain business operations without having to rely entirely on debt or external capital.
• Ensuring dividend payment: This is an important financial source to pay dividends to shareholders. Maintaining and enhancing dividends can increase shareholder confidence, keep stocks attractive and attract investment.

4. Factors affecting retained profits

The retained earnings of a business not only depends on business performance but is also affected by many different factors. Here are some important factors that can affect retained earnings:

4.1 Initial retained earnings

The profit balance at the end of the previous period (accumulated from previous periods) will be converted into the opening balance for the next accounting period. If this value is positive, it means the business made a profit in the previous period. On the contrary, if the value is negative, it will indicate that the business has recorded a net loss and may face the possibility of not having enough financial resources to reduce debt and pay dividends to shareholders during the accounting period. before.

4.2 Net income

When a business has a net profit, retained earnings have a positive value, creating opportunities to expand investment and development. On the contrary, recording a net loss means that retained earnings may have a negative value. As a result, businesses may face difficulties, reducing their ability to meet capital needs in the following periods.

4.3 Dividends

Enterprises can pay dividends to shareholders through two methods: in cash or in shares, specifically as follows:

• Using cash will impact the business's cash inventory, causing a decrease in retained profits.
• Stocks do not affect the cash flow of the business, therefore do not affect retained earnings. This method keeps the equity size unchanged and increases the value per share due to the increased number of shares.

5. How to effectively manage and use retained profits

Managing and using retained profits effectively will help ensure financial stability and support sustainable business development. Here are some effective ways companies can apply:

5.1 Increase revenue and reduce costs

A simple way to increase retained earnings is to increase revenue, reduce costs or, in other words, increase net income generated during the period by expanding customer groups, offering new products/services. , or make price adjustments. At the same time, businesses can apply cost reduction measures including cutting advertising costs, rent and personnel costs,...

5.2 Investing in sustainable growth

Investing in sustainable growth is an important strategy to help businesses not only grow strongly in the short term but also ensure stability and sustainable development in the future. Some ways that businesses can invest in sustainable growth include:

• Environmental management: Focus on considering solutions to save energy, reduce waste, recycle and use recycled materials, as well as invest in green technology to reduce pollution and impact on the environment. environment.
• Ensuring product and service quality: Focus on creating quality, safe and sustainable products and services to meet customer needs without harming the environment through research and development activities. develop.
• Enhance social responsibility (CSR): Implement CSR campaigns and programs to contribute value to the community, people and the environment. At the same time, this is also a way for businesses to increase their image and name recognition in the eyes of partners and customers.

5.3 Manage the enterprise's debt well

Businesses should set a goal to reduce debt as much as possible, as high debt can affect profits and reduce retained earnings. To optimize resources, businesses need to establish an effective financial management system. This includes monitoring cash flow, maintaining accurate financial records, and making informed decisions based on financial data.

5.4 Use financial and accounting management software

Accounting and financial management software is an effective means to improve financial management and at the same time enhance a business's retained earnings. This not only helps automate accounting processes, minimize errors, increase management efficiency, but also aids in accurate financial forecasting and detailed cash flow management.

6. 1C:Company Management software supports effective accounting and financial management

1C:Company Management is a flexible and customizable business management solution that connects every aspect of your business on a single platform. 1C:Company Management software includes the modules Sales, Purchasing, Production, Warehouse, Finance and Human Resources, salaries, etc. to help optimize processes, save time and costs. For financial management operations, 1C:Company Management has the following outstanding advantages:

• Fully meet the accounting operations, support the short and long-term business plan strategy of the enterprise.
• Provides a diverse and intuitive reporting system according to user permissions.
• Provide customer receivables reports on a timely basis.
• Provides intuitive sales reports, cash capital,...

Retained profits play an important role in the comprehensive picture of corporate financial activities. Hopefully this article from 1C Vietnam will provide useful information about the concept of " What is retained earnings ?" has been clarified. To increase management efficiency, businesses can refer to 1C:Company Management software, which provides a professional financial management module. If you have any questions, please contact 1C Vietnam immediately for detailed advice.