Retained earnings, dividends, and why they matter
Learn why retained earnings are important for your business
Retained earnings are the accumulated after-tax profits your company has built up since incorporation that have not been paid out as dividends. They are the legal source from which dividends must be paid.
Why retained earnings matter
A dividend can only be paid legally if the company has sufficient retained earnings to cover it. Paying a dividend when retained earnings are insufficient is an unlawful distribution. Directors who authorise unlawful dividends may be personally liable to repay them.
Checking your retained earnings
In Xero, run a Balance Sheet set to today. The Retained Earnings figure in the Equity section shows the accumulated distributable reserves. We check this figure before preparing any dividend paperwork. Never pay a dividend without confirming the retained earnings position with us first.
💡 Good to know: Retained earnings and the cash in your bank account are not the same thing. You may have significant retained earnings but low cash if profits have been reinvested in equipment or tied up in unpaid invoices. Always check both positions before planning a dividend.
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