18.1 What is Equity?
18.1.2 Retained Earnings
The retained earnings account is a separate category of equity that represents the cumulative amount of profit earned by the company since its inception, less the cumulative
amount of dividends declared. Sometimes, either as a management choice or as a legal
requirement, certain portions of the retained earnings are set aside or appropriated.
Appropriations of retained earnings are created to ensure that dividends are not paid
from these balances, and these appropriations need to be reported separately. When the
retained earnings account falls into a negative (debit) balance, it is usually referred to as
a deficit, or retained losses. Retained earnings are sometimes subject to other types of
accounting adjustments, such as accounting policy changes and error corrections, which
are discussed in other chapters.