Retained earnings

Definition

Profit the company has kept over its life and never paid out to owners.

Why It Matters

It is the line a new owner meets on their own balance sheet and misreads first, because it is not cash: the money was earned and spent on equipment, stock and payroll years ago, so a large retained earnings figure sits happily beside an empty bank account. Which of the two you inherit depends on how you bought. A stock purchase carries the balance sheet across with its history intact; an asset purchase starts the account at zero on day one, because the entity is new. Ask which one your deal is before reading anything into the number.

In numbers: A company showing $800,000 of retained earnings and $40,000 in the bank has spent the difference on assets and working capital, which is the ordinary case rather than a warning.