Resources ❯ Accounting Terms

Retained Earnings

[ri-TEYND UR-nings]

What is the definition of Retained Earnings?

Accumulated undistributed earnings of a company retained for future needs or for future distribution to its owners.

Using Retained Earnings in an Example

At the end of the fiscal year, a company may report high retained earnings, indicating that it has reserved a significant amount of its profits instead of distributing them as dividends. These funds can be used for reinvestment in business operations, such as purchasing new equipment, funding research and development, or reducing debt.

Using Retained Earnings in a sentence

The CFO explained that the increase in retained earnings was due to the company's decision to reinvest profits into expanding its operations rather than paying out dividends.

Related Terms

R&D

Research and Development (R&D) refers to the systematic activities companies undertake to innovate and introduce new products and services or to improve their existing offerings. Research is the pursuit of new knowledge and understanding that could lead to new products, whereas development is the application of research findings or other knowledge into a plan or design for new or substantially improved products or processes.

REIT

A Real Estate Investment Trust (REIT) is an investor-owned trust that invests in real estate properties and offers unique tax advantages. Instead of paying corporate income tax, a REIT distributes most of its income directly to its shareholders who then report this income on their individual tax returns.

REMIC

A Real Estate Mortgage Investment Conduit (REMIC) is a special purpose vehicle that holds a fixed pool of mortgages and issues multiple classes of interests, or tranches, to investors. A qualified REMIC is generally taxed like a partnership, provided it does not accept contributions after its start-up day or engage in prohibited transactions.

RIC

A Regulated Investment Company (RIC) is a domestic corporation that operates as an investment agent for its shareholders by investing in government and corporate securities and distributing the dividends and interest income earned from such investments. To qualify as a RIC, a corporation must make an irrevocable tax election to be treated as such under specific regulatory conditions.

ROI

Return on Investment (ROI) is a financial ratio that measures the profitability of an investment as a percentage of the original cost. It is calculated by dividing the net income from the investment by the initial cost of the investment.

Rate of Return

The percentage of profit or interest earned on an investment over a specific period, reflecting the efficiency and profitability of the investment.

Ratio Analysis

A financial analysis technique that involves comparing different financial statement items of a company to identify trends, relationships, and financial health. Ratio analysis is used to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability, and solvency.

Raw Material

Raw materials are basic, unprocessed substances or components used in the manufacturing process to produce finished goods.

Raw Materials Inventory Account

An account on the balance sheet that represents the total cost of raw materials that are intended for use in production but have not yet been utilized in the manufacturing process.

Real Estate

Real estate refers to a piece of land along with any permanent improvements attached to the land, including buildings, houses, fences, and other structures, as well as the rights associated with the air above and the earth below the property.

Real Estate Investment Trust (REIT)

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate. REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership without actually having to buy, manage, or finance any properties themselves.

Real Estate Mortgage Investment Conduit (REMIC)

A pass-through tax entity that holds a fixed pool of mortgages secured by real property and issues multiple classes of ownership interests to investors. These interests may be in the form of pass-through certificates, bonds, or other legal forms. A REMIC is generally taxed like a partnership and was created under the Tax Reform Act of 1986.

Real Income

Income of an individual, group, or country, adjusted for changes in purchasing power due to inflation, reflecting the actual buying power of the income.

Real Interest Rate

The interest rate adjusted for inflation, calculated by subtracting the inflation rate from the nominal interest rate. This rate reflects the true cost of borrowing and the real yield to investors.

Real Property

Land and any permanent structures or improvements affixed to the land, including buildings and fixtures, that are considered an inherent part of the property and are customarily transferred with the land.

Real Rate of Return

The return on an investment after adjusting for inflation, reflecting the actual purchasing power of the amount returned.

Realization

The process of converting an asset into cash, typically through a sale.

Realized Profit (or Loss)

Profit or loss resulting from the sale or other disposal of a security or asset, which is recognized when the transaction is completed and the financial outcome is known.

Reasonable Assurance

Reasonable assurance refers to a high level of confidence achieved through internal controls over financial reporting, suggesting a remote likelihood that material misstatements will not be prevented or detected on a timely basis.

Rebate

A rebate in financial contexts typically refers to a return of a portion of interest or charges to a party, which can occur in lending when unearned interest is refunded if a loan is paid off before its maturity, or in securities lending where a portion of the interest earned by the lender of the stock is returned to a short seller.

Recapitalization

Recapitalization is the process of restructuring a company's debt and equity mixture, often with the aim of making a company's capital structure more stable or efficient. This may involve the exchange of one form of financing for another, such as replacing bonds with stock, or altering the mix between equity and debt in the capital structure.

Receivable Turnover

A financial ratio that measures how efficiently a company uses its assets by comparing net credit sales with the average accounts receivable during an accounting period. This ratio indicates how well the company manages its credit and collects debts from customers.

Receivables

Amounts of money due from customers or other debtors, usually arising from sales or services provided on credit.

Recession

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months. It is typically visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins after the economy reaches a peak of activity and ends as it reaches its trough. Between these points, the economy is in an expansion. The National Bureau of Economic Research (NBER) uses monthly data to determine the start and end dates of recessions.

Reconcile

In accounting, to reconcile means to ensure that two sets of records (usually the balances of two accounts) are in agreement. Reconciliation is a process used to ensure that the money leaving an account matches the actual money spent.

Reconciliation

The process of comparing two sets of records to ensure they are in agreement and accurate, often used to verify the accuracy of financial records by matching transactions from different sources.

Recovery

In economics, recovery refers to a phase in the business cycle where economic activity increases, leading to growth in gross national product and often transitioning into an expansion phase. In finance, it can also refer to a period where securities prices rise following a decline.

Red Herring

A preliminary prospectus distributed to potential investors during the waiting period between the registration of a new securities issue with the Securities and Exchange Commission (SEC) and the effective date of the registration statement. A red herring contains details about the business and its upcoming offering but is not an offer to sell or a solicitation of an offer to buy.

Redemption Value

The price at which a company agrees to repurchase its bonds or preferred stock from holders, effectively retiring the securities.

Refinancing Agreement

An arrangement to replace existing financing with new funding, commonly used to refinance a home mortgage or other loans to obtain better interest rates or different terms.

Refunding

The process of replacing an existing debt with a new one, typically with lower interest costs, by redeeming the old debt with proceeds from issuing new debt obligations that have equal or superior ranking.

Registrar

A financial institution or agency responsible for recording the issuance and ownership of company securities, such as stocks and bonds.

Regression Analysis

A statistical technique that identifies the relationship between a dependent variable and one or more independent variables. This method is used to predict the value of the dependent variable based on the values of the independent variables, often for purposes of forecasting or decision making in various fields, including economics and finance.

Regressive Rate

A rate that decreases as the calculation base increases, commonly applied to taxation systems where the tax rate diminishes as the taxable income of an individual or entity increases.

Regulated Investment Company (RIC)

A domestic corporation that operates as an investment agent for its shareholders, typically investing in government and corporate securities and distributing the dividends and interest income earned from such investments. To qualify as a RIC, a corporation must make an irrevocable tax election to be treated as such under specific regulatory conditions.

Reinsurance

The process by which an insurance company transfers portions of its risk to other insurers to reduce the likelihood of paying a large amount on a single claim. This practice allows the sharing of risk and division of client premiums among insurers.

Reinvestment Rate

The rate of return obtained from reinvesting the earnings, such as interest or dividends, from an investment like a bond or other fixed-income security.

Related Party Transaction

A transaction between entities or individuals that share a pre-existing, non-arm's-length relationship, such as family members or companies under common control. These transactions often face increased scrutiny for tax and financial reporting purposes due to potential conflicts of interest and the possibility of non-market terms.

Relevant Assertions

Assertions that have a meaningful bearing on whether the account is fairly stated, impacting the accuracy and validity of financial statements.

Reorganization

Reorganization refers to the process of restructuring a corporation's capital arrangements or creating a plan to restore a debtor's business to financial health. This process often involves changes that allow the corporation and its shareholders to not recognize any gain or loss on the exchange of stock.

Repairs

Expenditures made to maintain property in good working condition without significantly prolonging its life or increasing its value.

Replacements

Expenditures incurred to restore or replace parts of property that have deteriorated through use or have been damaged or destroyed through accident.

Report

A written or oral account that describes and confirms details of an event, situation, or activity, often including specific data or outcomes related to financial transactions or business operations.

Report Release Date

The date on which a company's financial statements are officially issued and made available to the public.

Repos

An agreement in which an institution sells securities with a commitment to repurchase the same securities at a specified price on a future date, typically used for short-term borrowing.

Repurchase Agreement (Repos)

A repurchase agreement, or repo, is a short-term agreement in which one party sells securities to another party with a promise to repurchase the securities at a later date at an agreed-upon price.

Required Rate of Return

The minimum return that investors expect to receive for investing in a particular asset, given its risk level.

Rescind

To cancel, revoke, or repeal a contract, often due to misrepresentation, fraud, or illegal procedures.

Research and Development (R&D)

Research and Development (R&D) refers to a series of investigative activities to improve existing products and procedures or to lead to the development of new products and procedures.

Research and Development Costs

Expenses incurred in the process of discovering, developing, and enhancing a company's products, services, or processes. These costs can include salaries, materials, and overhead expenses directly related to the R&D activities.

Reserve

An account used to earmark a portion of equity or fund balance to indicate that it is not available for expenditure, often reflecting contingent liabilities or other financial commitments.

Resident Alien

An individual who is not a citizen of the United States but has established residence in the country. Resident aliens are subject to the same tax obligations on their worldwide income as U.S. citizens.

Residual Value

The estimated net scrap, salvage, or trade-in value of a tangible asset at the estimated date of disposal.

Restricted Assets

Assets, including cash, whose utilization is limited or restricted for specific purposes as stipulated by contractual agreements or regulatory requirements.

Restricted Fund

A fund established to account for assets whose income must be used for specific purposes as stipulated by donors or grantors.

Restructuring

The process of reorganizing a company's structure or operations to increase efficiency, adapt to new markets, or improve financial stability. This may involve changes in capital structure, debt renegotiation, mergers, acquisitions, divestitures, spin-offs, or other major corporate transactions.

Retail Method

A method used in retail businesses to estimate inventory cost by comparing the cost of goods available for sale with the retail price of the goods available for sale.

Retained Earnings Account

The account that reflects the cumulative amount of net income earned by a company that has been reinvested in its operations and not distributed to its shareholders as dividends.

Retire

In finance, to retire a security means to remove it from circulation, typically by paying off a debt or extinguishing the security.

Return

The change in the value of an investment over a period, including any profits and distributions, usually expressed as an annual percentage rate.

Return on Assets

A financial metric that measures the profitability of a company relative to its total assets, calculated by dividing net income by average total assets. This ratio indicates how efficiently a company is using its assets to generate earnings.

Return on Equity

A financial ratio that measures the profitability of a company in relation to the shareholders' equity, calculated by dividing net income by average shareholders' equity.

Return on Investment (ROI)

Return on Investment (ROI) is a financial ratio that calculates the percentage return on the money invested in relation to the profit gained from that investment. It is commonly used to evaluate the efficiency of an investment or compare the efficiency of several different investments.

Return on Sales

Return on Sales (ROS) is a financial ratio that measures the efficiency of a company in generating profits from its sales. It is calculated as net pretax profits divided by net sales, expressed as a percentage. This ratio is useful for assessing operational efficiency and comparing performance over different periods or against other companies in the same industry.

Revenue Recognition

The accounting principle that determines the specific conditions under which income becomes realized as revenue. Generally, revenue is recognized when a critical event has occurred and the dollar amount is easily measurable.

Revenues

Revenues are the total income generated from the sale of goods, provision of services, or other key business activities, including earnings from interest, dividends, and rents.

Review

An accounting service where a Certified Public Accountant (CPA) provides limited assurance on the reliability of financial information without conducting a full audit under Generally Accepted Auditing Standards (GAAS).

Review Engagement

An agreement between a Certified Public Accountant (CPA) and a client to perform a review of the client's financial statements to ensure accuracy and compliance with accounting standards, without the extensive checks involved in an audit.

Review Report

A Review Report is a formal document issued by an accountant or accounting firm that presents the findings of a review engagement. The report provides limited assurance that no material modifications need to be made to the financial statements for them to be in conformity with the applicable financial reporting framework.

Right of Rescission

The legal right granted under the Federal Consumer Credit Protection Act of 1968, allowing a consumer to void a contract within three business days, ensuring a full refund of any down payment without any penalties.

Right to Setoff

A debtor's legal right to discharge all or a portion of the debt owed to another party by applying against the debt an amount that the other party owes to the debtor.

Risk

The measurable possibility of losing or not gaining value.

Risk Management

The process of identifying, analyzing, and responding to business risks in a way that aligns with the entity's risk tolerance and ensures an acceptable risk-return relationship.

Risk-Adjusted Discount Rate

In finance, the risk-adjusted discount rate is the rate used to calculate the present value of uncertain or risky future cash flows. It consists of the risk-free rate plus a risk premium that compensates for the risk associated with the specific investment or project.

Routine Transactions

Recurring financial activities that are regularly reflected in the accounting records during the normal course of business.

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