Retained Earnings
Bénéfices non répartis in French
Quick definition
Retained earnings are the cumulative profits a business has kept over its whole life instead of paying them out to owners. They sit on the equity side of the balance sheet and grow or shrink with each year's result.
The running total of kept profits
Every year, a business earns a profit (or a loss) and decides how much to hand to the owners. Whatever stays behind is added to retained earnings. The arithmetic is one line: opening balance + net income - dividends or draws = closing balance.
Start the year with $100,000 of retained earnings, earn $60,000 of net income, pay out $25,000 in dividends, and you end the year with $135,000. Repeat that every year since the business began and you get the current balance: retained earnings are the whole history of the business compressed into one number.
What retained earnings are not: a pile of cash
This is the classic confusion, so let us name it plainly: retained earnings are not money sitting in an account. A company can show $500,000 of retained earnings and $10,000 in the bank, with nothing wrong.
Retained earnings live on the equity side of the balance sheet; they record where financing came from (kept profits, rather than debt or new owner money), not where it went. The money itself was long ago put to work and now lives on the asset side, as equipment, inventory, receivables and, sometimes, cash. Asking "where are my retained earnings?" is asking the wrong side of the balance sheet. To know how much cash the profits actually produced and where it went, read the cash flow history, not the equity section.
When the number goes negative
If accumulated losses exceed accumulated profits, retained earnings turn negative, and accountants relabel the line a deficit. This is common and not automatically alarming in young companies that invested heavily before reaching profitability. It becomes serious when a mature business shows a growing deficit: the losses are consuming the owners' stake year after year.
The yearly decision: retain or distribute
For an incorporated owner, retained earnings embody a real decision made every year. Retain, and profits stay in the company to fund growth, having been taxed only at the corporate rate, which for most active small businesses means the low rate provided by the small business deduction. Distribute, and the money comes out as dividends, taxed again in the owner's hands personally.
The deferral logic in one line: money kept inside the corporation faces only the low corporate tax for now, leaving more working dollars, and the personal tax bill arrives only when you eventually pay yourself.
In Canada
On the T2 return, retained earnings appear in the GIFI balance sheet, and schedule 100's equity section must tie year over year: last year's closing balance plus this year's income minus dividends must equal this year's closing balance, which is one of the first consistency checks the CRA and lenders run. The retain-or-distribute decision is a core piece of Canadian owner-manager planning, usually decided with an accountant each year alongside the salary-versus-dividend question.
Worked example
Dev's incorporated consulting firm started the year with $80,000 of retained earnings. This year it earned $70,000 of net income and paid Dev $30,000 in dividends, so the closing balance is $120,000. But the bank account holds only $20,000. The rest of the story is on the asset side: over the years the company bought $40,000 of equipment, carries $35,000 of unpaid client invoices, and repaid a $25,000 startup loan. The retained earnings are real, and they are fully invested in the business, not stacked in a vault.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated August 2026