Retained profit is the profit a company has kept in the business over time, after dividends have been paid out. It sits in equity next to share capital, and it grows when a company earns profit and pays out less than it earned.
It appears in every company statement you prepare in company accounting. You also need it to read the statements you are given, which is where marks are easily lost.
How does retained profit move each year?
Think of it as a running total. Each year it starts at last year’s closing figure, then profit is added and dividends are deducted.
Opening retained profit + profit for the year − dividends = closing retained profit
If the company makes a loss, the loss is deducted in place of profit. Retained profit is not a cash figure. It records that profit was earned, while the profit may now be tied up in inventory, equipment or money owed by customers.
Worked example
Pelangi Crafts Ltd has these figures for the year ended 31 March 2026.
| Item | RM |
|---|---|
| Retained profit at 1 April 2025 | 18,000 |
| Profit for the year | 12,500 |
| Dividends paid | 5,000 |
Step 1, add the profit. 18,000 + 12,500 = RM 30,500.
Step 2, deduct the dividends. 30,500 − 5,000 = RM 25,500.
Step 3, interpret it. The company kept RM 7,500 of this year’s profit (12,500 − 5,000). That is 60% of the year’s profit (7,500 ÷ 12,500 = 0.6), and 40% was paid out.
Step 4, compare with cash. Suppose the company also spent RM 6,000 on extra inventory during the year, and nothing else changed. The effect on cash of these items is 12,500 − 6,000 − 5,000 = RM 1,500. The company reports RM 12,500 profit, yet its cash grew by only RM 1,500.
The retained profit balance is real, but it is tied up in inventory and other assets. It cannot be spent as it stands.
The mistake to watch for
A common error is to read retained profit as money available to spend.
Mistaken comment: “Retained profit is RM 25,500, so the company has RM 25,500 in the bank.”
The student mixed up a profit total with a cash balance. The two are on different parts of the statement and measure different things.
The correction is to look at the bank line in current assets for cash, and to read retained profit as the amount of profit the owners have left in the business. If a question asks how the company could pay a larger dividend, the honest answer starts with cash, not with retained profit.
Check yourself
Try these, then open each answer.
1. Opening retained profit is RM 30,000. Profit for the year is RM 9,000. Dividends are RM 4,500. Find the closing figure.
Show answer
30,000 + 9,000 = 39,000. Then 39,000 − 4,500 = RM 34,500.
2. Closing retained profit is RM 41,000. Opening was RM 36,000. Dividends were RM 6,000. Find the profit for the year.
Show answer
Work backwards: 41,000 − 36,000 = 5,000 increase. Add back the dividends: 5,000 + 6,000 = RM 11,000 profit. Check: 36,000 + 11,000 − 6,000 = 41,000.
3. A company has opening retained profit of RM 8,000, a loss of RM 10,000 and no dividends. What is the closing figure and what does it show?
Show answer
8,000 − 10,000 = (RM 2,000), a negative balance. The company has lost more than the profit it had accumulated, so equity is lower than share capital alone.
Where this leads next
Retained profit is changed by dividends, so move on to explaining a dividend from supplied statements. The cash versus profit bridge shows the cash side of this lesson, and the percentage-base explorer helps with the proportion of profit kept.
If you can do the arithmetic but struggle to explain what a figure means, that is a good use of online one-to-one Accounting tuition. A teacher can listen to your explanation and sharpen it.