Restricted retained earnings

Definition

Restricted retained earnings are portions of a company's retained earnings that are not available for dividend distribution due to legal or contractual obligations. These restrictions ensure that certain financial covenants or future expenditures are adequately funded.

5 Must Know Facts For Your Next Test

1. Restricted retained earnings can stem from loan agreements, bond covenants, or state laws.
2. These restrictions protect creditors by ensuring that the company maintains a certain level of equity.
3. Common reasons for restrictions include mandatory sinking funds, legal reserves, and future expansion projects.
4. The amount of restricted retained earnings is typically disclosed in the notes to the financial statements.
5. Unlike unrestricted retained earnings, restricted retained earnings cannot be used freely for dividends or share buybacks.

Review Questions

Related terms

Shareholders' Equity: The residual interest in the assets of an entity after deducting liabilities.

Unrestricted Retained Earnings: Portions of a company's retained earnings that are free to be distributed as dividends or used for other purposes.

Dividend Restrictions: Limitations imposed on how much profit can be paid out as dividends, often due to loan agreements or regulatory requirements.