Glossary
What are retained earnings?
How retained earnings roll forward from one year to the next, what a dividend or a loss does to them, and how they differ from share capital.
Updated
In short
Retained earnings are the accumulated profits a business has kept instead of paying out. SimpleERP computes them from the ledger and shows prior-year and current-year earnings on the balance sheet, with no closing entry.
Retained earnings are the profits a business has kept since it started, less losses and less what was paid out to owners or shareholders as dividends or drawings. They sit under equity in the balance sheet. Each year's net profit is added at year end. In Indian company accounts the line is usually called surplus in the statement of profit and loss under reserves.
Retained earnings: a worked example
Lakshmi Steel Furnitures, a private limited company, carried ₹40,000 of retained earnings into 2025-26. That year it made a net profit of ₹2,60,000 and paid its shareholders a dividend of ₹1,00,000.
| Retained earnings roll-forward | Amount |
|---|---|
| Retained earnings, 1 April 2025 | ₹40,000 |
| Add: net profit, 2025-26 | ₹2,60,000 |
| Less: dividend paid | ₹1,00,000 |
| Retained earnings, 31 March 2026 | ₹2,00,000 |
| Current year earnings, April to September 2026 | ₹4,12,800, shown on its own line |
How are retained earnings different from capital?
Share capital is what the owners paid in, and it stays the same unless new shares are issued. Retained earnings are what the business earned and kept, and they move every year with profit, losses and dividends. Both sit under equity; the capital account page covers the first.
What happens to retained earnings after a loss?
A loss reduces them. Had Lakshmi Steel lost ₹2,50,000 in 2025-26, the year would have closed with retained earnings of minus ₹2,10,000 even before any dividend. A negative balance is shown as a deduction under equity, and a company cannot pay a dividend out of it.
FAQ
Questions, answered
What is the formula for retained earnings?
Closing retained earnings equal opening retained earnings plus the year's net profit, less dividends or drawings paid from it. A loss reduces them. The figure is cumulative, so it carries forward from every year since the business started.
Are retained earnings the same as cash?
Retained earnings are not cash. They are profit kept in the business on paper. That profit may already be tied up in stock, machines or money customers owe. Read the cash and bank balances for cash.
Why does SimpleERP not post a year-end closing entry?
Because the balance sheet computes prior-year profit from the ledger each time it runs, a closing entry would only duplicate it. You close the year by setting the lock date, after which nothing dated in that year can be posted or changed.
How do I record a dividend in SimpleERP?
SimpleERP has no dividend screen. Post a manual journal debiting Retained Earnings and crediting Bank for the dividend paid, using the amount your board approved and your CA confirmed. The balance sheet then shows prior-year retained earnings net of the dividend.
Does a proprietorship have retained earnings?
A proprietorship usually credits profit to the owner's capital account instead. SimpleERP shows it as computed earnings lines under equity whatever the business type; your CA can post a transfer to capital if the accounts are presented that way.
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