Retained Earnings
What does it mean
Equity on a balance sheet can typically be broken down into three types (Common Stock, Additional Paid in Capital & Retained Earnings), and these types differ based on the original source of those funds being added into the business. Retained Earnings represents the sum total of all historical earnings (or losses) that have not been distributed out to shareholders.
Formula: Retained Earnings = Beginning Retained Earnings + Current Income - Distributions + Contributions
Why does it matter
The different types of equity allows a banker to quickly identify how the equity in a business was created. Knowing that the equity in the business was built via successfully operating a profitable business (high amount in retained earnings) versus just having investors kick in a bunch of money at the inception of the business (high amount in Common Stock) is important.
Other Relevant Terms
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Greetings! I'm Clay Sharkey, and there is nothing I like more than assisting others in achieving their goals. I firmly believe that by enhancing a banker's understanding of their customer's' business, they can provide superior service. This superior service, in turn, leads to stronger relationships for the bank, improved performance for the businesses, and better experiences for our communities. Win-win-win.
