What does retained earnings refer to?

Retained earnings refer to the cumulative amount of net income that a company has retained, rather than distributed to shareholders as dividends. This retained income is important as it reflects the profits that are reinvested back into the business for various purposes such as funding expansion, paying off debt, or enhancing operational capabilities. By retaining earnings, a company can finance its growth and development without having to rely on external financing. This contributes to the long-term financial health of the business and can ultimately enhance shareholder value.

The other options focus on different financial concepts. Income distributed to shareholders directly counters the definition of retained earnings, which specifically refers to the income kept within the business. Liabilities represent obligations that a company owes to external parties and do not correlate with retained earnings, which are a component of shareholders' equity. Similarly, assets that have been depreciated refer to the reduction in value of physical assets over time, which is unrelated to the concept of retained earnings. Understanding retained earnings is crucial for grasping how companies manage their profits and growth strategies.