What are retained earnings?

Retained earnings are like the savings jar you keep under your bed after getting an allowance.

Imagine you get $10 every week from your parents. Some weeks, you spend all of it on candy and toys. Other weeks, you save some money, that’s retained earnings. The saved money stays in your jar so you can use it later for something bigger, like a video game or a new backpack.

Let’s say you keep $5 every week from your allowance. After 4 weeks, you have $20 saved up. That’s retained earnings, the money you didn’t spend but kept to use later.

Your parents are like a company, and your allowance is like income. When the company earns money, it can either spend it or save some of it. The saved part is retained earnings, which helps the company grow or pay for bigger things in the future, just like how you might use your savings to buy that special toy you wanted all year.