x Many businesses and production and business establishments do not clearly understand or misunderstand retained profits?
x Do you want to update the details of the retained profit calculation as well as the factors that affect this profit?
x Does your business not know how to use this retained profit effectively?
At PROSHIP.VN we will answer all questions related to what retained profits are, what are the factors that directly affect retained profits? How to use retained profits most effectively for businesses?,... From here, businesses can adjust their production and business strategies to bring more final retained profits to the company. .
What is retained earnings?
What is retained earnings? Retained earnings (RE) is the remaining amount after distributing dividends to shareholders, paying taxes and deducting losses from the gross profit of the business. This retained profit is understood as the final profit of the business.
Retained Earnings are recorded in the equity section at the end of the accounting period on the balance sheet, often used for business reinvestment purposes, debt payments, dividend payments or financial reserves. for business in the future.
Factors affecting retained earnings
What are the factors that directly affect retained earnings? Based on the method of calculating retained profits, we can deduce 3 factors that affect it, including initial retained profits, net income (profit/loss) and dividends:
Net income
If the business earns a net profit, the retained profit is likely to have a positive value, and the business has a lot of room to expand investment and development.
If the net loss causes retained earnings to have a negative value, the business may be facing difficulties, meaning that in the following periods, the business may not be able to meet its capital needs.
Initial retained earnings
The profit balance at the end of the previous period (accumulated from previous periods) will become the balance at the beginning of the next accounting period.
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If this value is positive, it means that the previous accounting period was profitable, and if negative, the previous period was a net loss and the business did not have enough finances to offset debts and pay dividends to shareholders.
Dividends
Businesses can pay dividends to shareholders in cash or shares. If paid in cash, it will affect the business's cash balance, leading to a decrease in retained profits.
If paid in shares, it will not affect the cash flow of the business, so it will not affect retained profits, it will also maintain the size of equity and increase the value per share due to the increase in the number of shares. increase.
What is the formula and method to calculate retained earnings?
Retained profits are determined according to the formula:
Retained profits at the end of the period = Retained profits at the beginning of the period + Net income (Net loss) arising during the period – Dividends paid during the period.
* In there:
- Retained profit at the beginning of the period: Accumulated profit balance at the beginning of the period;
- Net income arising during the period: The amount of profit after tax (Loss) is determined by subtracting total expenses in that period from total revenue.
- Dividends paid during the period: Dividends must be paid to shareholders who contribute capital in shares or cash.
Net income arising during the period is determined according to the formula:
Net income arising during the period = Total revenue arising during the period – Total expenses arising during the period
* In there:
- Total revenue generated during the period includes: Net revenue, profit from financial activities and other income;
- Total costs incurred in the period include: Cost of goods sold, business management costs, corporate income tax costs, sales costs, and other costs.
* For example: Company A has a profit after tax in 2025 of 80 billion VND, paying dividends to shareholders of 40 billion VND. The accumulated retained profit by the end of 2024 is VND 40 billion. Calculate cumulative retained earnings until the end of 2025.
- Retained profits in 2025 = Profit after tax – Dividends = 80 billion – 20 billion = 40 billion VND;
- Cumulative retained profits until 2025 = Accumulated profits by the end of 2024 + Retained profits in 2025 = 40 billion + 40 billion = 80 billion VND.
How to use retained profits effectively for your business
Proship tells your business how to use retained profits effectively:
Reinvest and expand business activities
Businesses can use retained profits for activities to promote business development such as:
- Investing in improving product quality or developing new products;
- Diversify sales channels;
- Establish more branches to expand business scale.
Invest and contribute capital to other businesses
Businesses can use retained profits to invest and contribute capital to other businesses that are doing business effectively to contribute to increasing profits and expanding the scale of operations for the business.
Effectively manage business debt
Businesses need to achieve the goal of maximum debt reduction because debt not only affects profits but also reduces retained profits. Businesses need to take measures to control cash flow and make reasonable business decisions based on financial data.
Use new generation financial and invoice management tools
Transparent financial management and input and output invoice data helps businesses understand the situation of their business to support more effective management and avoid unnecessary mistakes.
Buy shares from shareholders
For joint stock enterprises, if a shareholder wants to resell shares or the enterprise wants to adjust its ownership ratio, it can use retained profits to buy back.
What is retained profit , what is the formula for calculating retained profit as well as how to use this retained profit effectively are the basic knowledge you need to know about retained profit that Proship has provided. recorded. Production and business enterprises should research, learn and apply to their units. If you have any questions, contact 0909 344 247 for answers and advice on the best cheap multimodal transport services in 2025.
