Question

What is retained earnings? Explain Determinants of retained earnings.

Answer 1

Meaning: The process of accumulating corporate profits and their utilisation in business is called retained earnings.

Determinants of retained earnings:

1. Total earnings of the company: If there is ample profit, company can save and retain some parts of the profit. With more earnings, a company can save more. The attitude of top management also determines the amount of retained earnings.
2. Taxation Policy: The taxation policy of the government is also an important determinant of corporate savings. If the taxes levied are at high rates, the company cannot save much of the profits in the form of reserves.
3. Dividend Policy: It is a policy of the Board of Directors in regard to the distribution of profits. A conservative dividend policy is needed to have a good accumulation of profit. But this policy affects shareholders as they get dividends at a lower rate.
4. Government Control: A government is the regulatory body of the economic system of the country. Its policies, rules and regulations ensure that the companies work as per its regulations. The company has to formulate its dividend policy in accordance with the rules and regulations framed by the Government.