All the profit the business has kept over its life, not paid out to owners.
Retained earnings is the accumulated total of every profit the business has ever earned, minus every loss and everything paid out to owners. It lives in the equity section of the balance sheet and grows (or shrinks) each year by that year's result.
The classic misunderstanding: retained earnings is not a pile of cash. It's an accounting total — the profits may long since have been spent on equipment, inventory, or growth. A business can have large retained earnings and little cash, or the reverse.
Over four years a business earns $25,000, $30,000, $40,000, and $35,000, and the owner takes $60,000 in distributions along the way. Retained earnings: $130,000 − $60,000 = $70,000 — regardless of what the checking account holds today.
Owner's Equity · Net Profit · Owner's Draw — or browse the full plain-English glossary.
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