What is retained earnings in accounting?

Retained earnings represent the cumulative amount of net income that a company has retained for reinvestment in the business after accounting for dividend payments to shareholders. This figure is crucial because it reflects the portion of profits that is not distributed but instead kept for reinvestment in activities such as expanding operations, paying down debt, or saving for future downturns.

By focusing on retained earnings, businesses can utilize their profits to fund their growth strategies without needing to rely solely on external financing. Retained earnings are typically reported in the shareholders' equity section of the balance sheet and are an indicator of the financial health and potential for growth within a company.

In contrast, the other options do not accurately define retained earnings. For instance, total cash flow generated by a company refers to the operational cash that flows in and out and does not account for specific net income retention. The total value of a company’s liabilities pertains to what the company owes, rather than what it has earned and retained. Lastly, the profit distributed to shareholders relates to dividends, which are the opposite of retained earnings, as they represent the money paid out rather than retained within the company.