---
title: "What is retained earnings?"
description: "Retained Earnings explained in plain English: definition, how it works, an example, and how it appears in QuickBooks and Xero."
url: https://ledgerbpo.com/glossary/retained-earnings/
updated: 2026-09-11
publisher: LedgerBPO (SS Support Network LLC)
language: en-US
---

# What is retained earnings?

Glossary

Retained earnings is the cumulative net income a business has kept and reinvested since it started, after subtracting any dividends or distributions paid to owners. It appears in the equity section of the balance sheet and rolls forward year over year.

Updated September 2026

## How retained earnings works

At the end of each fiscal year, accounting software automatically closes the current year's net income or loss into retained earnings, resetting income and expense accounts to zero for the new year. The running retained earnings balance therefore reflects every year of profit or loss the business has ever had, not just the current year.

A negative retained earnings balance, sometimes called an accumulated deficit, means a business has lost more money over its history than it has earned, which lenders and investors check closely. Owner's draws or distributions reduce equity directly but do not reduce retained earnings itself; the two are tracked as separate lines within equity. Comparing retained earnings across several years shows whether a business has been consistently profitable or has had rough patches, which is one reason lenders reviewing a loan application often ask for several years of balance sheets rather than just the most recent one.

## Example

A company starts the year with $150,000 in retained earnings. It earns $40,000 in net income this year and its owner takes $25,000 in distributions during the year. At year-end close, retained earnings rolls forward to $190,000, the $150,000 plus $40,000 net income, while the $25,000 in distributions sits in its own equity account rather than reducing retained earnings directly. If the business posts a loss the following year instead, retained earnings would decrease from $190,000 rather than continuing to grow, showing the cumulative effect of that year's results.

## Retained earnings in QuickBooks Online vs Xero

QuickBooks Online and Xero both close net income into retained earnings automatically at fiscal year-end, and neither requires a manual closing entry the way older desktop systems sometimes did. Both platforms let you run a balance sheet as of any prior date to see what retained earnings looked like at that point in time.

## Related terms

- [Distributions](https://ledgerbpo.com/glossary/distributions/)
- [Owner's draw](https://ledgerbpo.com/glossary/owner-s-draw/)
- [Net income](https://ledgerbpo.com/glossary/net-income/)
- [All terms](https://ledgerbpo.com/glossary/)

## How LedgerBPO handles retained earnings

We keep your equity section accurate month to month, so retained earnings and distributions are always correctly separated and your balance sheet tells a true story of accumulated profit. When we take over a new client's books, checking prior-year retained earnings against historical returns is one of our standard cleanup steps.

[Bookkeeping done every week, not every quarter](https://ledgerbpo.com/services/bookkeeping/)

Next step

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Source: https://ledgerbpo.com/glossary/retained-earnings/ · Contact: https://ledgerbpo.com/contact/ · Full site map for agents: https://ledgerbpo.com/llms.txt