The number of earnings a company has not distributed to shareholders or creditors but retained.
Accumulated Income Details
When companies produce net income at the end of a fiscal period, they have the freedom to use the money in whatever suits their need. In one scenario, they can choose to distribute most of their income as dividends to creditors or shareholders as the rightful owners. Or, they can retain all of their earnings and utilize the money to reinvest back into the company in the form of purchasing new technology, improving R&D, or any other growth opportunity. The portion of earnings that is not distributed but invested is accumulated income.
Accumulated income is also known as retained earnings. On the balance sheet, accumulated income or retained earnings show up under the shareholder's equity section, assuming the company is publicly owned. Accumulated income equals accumulated income balance from the previous period plus net income minus paid dividends. If the company reports a net loss, accumulated income is subtracted.
Accumulated Income (AI) = AI Beginnning Balance + Net Income/Loss - Paid Dividends
One significant factor affecting how much earnings is retained or accumulated by a company is its business type. For slow-growth companies, they don't get as many benefits in excessive cash in hand as companies prioritize growth. Instead of simply letting the money sit still, they can distribute it to investors as dividends. Doing this can also benefit companies as dividend payments are one of the strongest tools in keeping investors.
Example of Accumulated Income
A company is successful in producing a net income of $1 million in one period. The company distributes 30% of net income or $300,000 to investors as dividends, both as cash dividends and stock dividends. Furthermore, we know that the company has the leftover accumulated income from the previous quarter of $600,000. Using this information, we can calculate the company's accumulated income for this period.
Accumulated Income (AI) = $600,000 + $1,000,000 - $300,000 = $1,300,000
The company’s accumulated income for this period is $1,300,000. As a fast-growing business, the company uses the retained earnings to put more money into research and development as well as buying new technology equipment.
Significance of Accumulated Income
Accumulated income is an essential component affecting the investment decisions of a company. The two options of reinvesting the money for capital spending or distributing it to shareholders have their pros and cons. Businesses that are mainly growth-oriented depend on funds and need all the money they can have. These companies often won't distribute even a single penny as dividends to investors, but they won't attract as many investors.
The reason why dividends-paying companies are more popular is that many traders are looking for short-term gain. Dividends are seen as an instant reward for putting their money into the company. Additionally, in some states, income from cash dividends is not subject to tax. That said, other traders are looking for long-term compensation. By trusting the company's management, they may obtain a much greater reward in the future, assuming the company is successful in its ventures.
Shareholders can sometimes be seen as the true owners who can influence what actions a company will take through a vote. Normally, shareholders choose the option to pay dividends, but this is not always the case. If the board of directors has enough knowledge about company plans and shares the same vision with the management, reinvesting the money back can yield higher profits. If the company has any outstanding debt, management and shareholders may also prioritize this.
Accumulated Income vs. Revenue
Accumulated income and revenue refer to two different aspects of a company's financial condition. In accounting, revenue is known as gross income, the company's total income before taking into account expenses, taxes, interests, and other costs. On the income statement, it's usually located at the top.
Accumulated income is the total opposite. It refers to the net income (gross income minus all expenses, including tax and interest) minus dividend payments. Accumulated income represents the money a company retains after all of its obligations has been paid for. Using retained earnings, a company can either use the fund to promote its growth or pays dividends or debts at a future date.