What is retained earnings in the context of a corporation?

Retained earnings represent the cumulative amount of net income that a corporation has earned over time, less any dividends that have been paid out to stockholders. Essentially, it is the portion of profits that is retained within the company for reinvestment in the business, debt repayment, or other uses, rather than being distributed to shareholders as dividends.

This concept is crucial for understanding how profits are managed within a corporation. When a corporation earns revenue, it may choose to reinvest some of that revenue back into the business to fuel growth, expand operations, or improve products and services. The amount that is held back and not distributed to shareholders is tracked in the retained earnings account on the balance sheet.

In contrast, the other options pertain to different financial concepts. The first option describes dividends, which are actual payments made to shareholders. The third option relates to expenses, which are costs incurred to generate revenue and do not contribute to retained earnings. The fourth option refers to invested capital, which represents funds raised from shareholders or lenders to generate growth and is distinct from retained earnings, which specifically pertains to past profits that have been retained in the business.