Retained Earnings are defined as:

• A. It is the cash on hand.
• B. The cumulative net income minus the cumulative dividends since the company’s founding.
• C. It is the total assets.
• D. It is the difference between revenues and expenses for the year.

Answer: (B)

Retained earnings represent the cumulative net income that a company reinvests in the business, after subtracting any dividends paid to shareholders. Each period’s net income increases retained earnings, while dividends decrease it. Therefore, the retained earnings balance equals the total net income earned since the company started minus the total dividends paid. This is why the definition “the cumulative net income minus the cumulative dividends since the company’s founding” is the correct description. Retained earnings are a part of shareholders’ equity on the balance sheet, reflecting profits kept in the business rather than distributed. It isn’t cash on hand, which is just liquidity; it isn’t the total assets, which include all resources; and it isn’t the yearly net income, which measures only that year’s profitability rather than the accumulated amount.