The mechanics
Retained earnings is a cumulative, running total: each year's net income adds to it, and each dividend paid out subtracts from it. It isn't reset to zero every year the way the income statement is — which is exactly why it sits on the balance sheet, a snapshot of an accumulated position, rather than on the income statement, a summary of one period's activity.
Where it lives in the T2's GIFI coding
On Schedule 100 — covered directly in Module 06 — retained earnings falls within the equity section of the balance sheet, in the GIFI 3000–3999 code range, alongside share capital and any dividends paid during the year.
Reading the roll-forward
The relationship is simple and worth memorizing: opening retained earnings, plus net income for the year, minus dividends paid, equals closing retained earnings. If a set of financial statements includes a separate statement of retained earnings, this is exactly what it lays out line by line; if it doesn't, the figure can be reconstructed by comparing this year's closing Schedule 100 balance to last year's.
What rising and falling balances tell you
A rising balance across multiple years corroborates that the business is earning more than it distributes — a straightforwardly reassuring sign. A falling balance, especially alongside a business that claims steady or growing net income, means more is being paid out than earned, which deserves an explanation rather than being waved past.
The lending question this feeds into
This module explains what the retained earnings figure is and how to read its trend across statements. Course 03's module on retained earnings and the owner explains what to actually do with that trend when qualifying an owner's income, or when evaluating a large dividend pulled out as a down payment source — the two modules are meant to be read together on any incorporated file.
