Retained earnings is a component of owners’ equity and links the “as of” balance sheet equation with the “activity” equation of the income statement.
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3.2. Accounting Equations gretainedearnings+Revenues− Expenses−Dividends
As its name suggests, retained earnings represent the earnings (i.e., net income) that are retained by the company—in other words, the amount not distributed as dividends to owners. <span>Retained earnings is a component of owners’ equity and links the “as of” balance sheet equation with the “activity” equation of the income statement. To provide a combined representation of the balance sheet and income statement, we can substitute Equation 2 into Equation 1a. This becomes the expanded accounting equation:
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