What retained earnings represents, from the lending angle
This module covers what retained earnings means for a lending decision; the accounting mechanics of how it's calculated and where it sits on the balance sheet belong to Course 04, Reading Financial Statements & T2 Schedules. From a lending angle, retained earnings is the corporation's running total of everything it has earned since it began, minus everything it has paid out to shareholders as dividends — its accumulated, undistributed profit.
Why an underwriter cares
Healthy, growing retained earnings over two or more years is corroborating evidence that a business is genuinely profitable, and that a salary or dividend the owner is claiming is actually sustainable — it's the corporate-side confirmation sitting behind whatever personal-side number is being used to qualify the file.
Retained earnings as a down payment source
An owner sometimes wants to withdraw accumulated retained earnings as a large, one-time dividend specifically to fund a down payment. That's a legitimate source-of-funds question — the full mechanics of documenting a down payment source belong to Course 07, Down Payment & Source of Funds — but it raises a separate, easily confused issue for qualifying income: a one-time large dividend pulled for a down payment is not the same thing as ongoing qualifying income, and treating it as both is a common and avoidable error.
What a shrinking balance signals
If retained earnings is falling year over year even while the owner reports steady or rising personal income, the business is paying out more than it earns — a sustainability flag worth raising and explaining before an underwriter raises it instead.
The bridge to the next module
Retained earnings describes what happens when money is paid out of a corporation at a sane, sustainable pace. The mirror-image situation — money flowing out to the owner without being formally recognized as salary or a proper dividend at all — is a shareholder loan, covered next.
