Which statement describes the role of retained earnings in a company's equity?

Retained earnings represent the portion of a company’s net income that is retained within the business rather than distributed to shareholders as dividends. This retained amount can be used to reinvest in the company, pay off debt, or reserve for future opportunities, and it is a key component of equity in the balance sheet. By retaining profits, a company can finance its growth or strengthen its financial position without needing external financing.

This understanding of retained earnings is crucial for assessing a company's long-term sustainability and its ability to invest in new projects or improve operations. Therefore, recognizing that retained earnings signify profits that have been reinvested rather than distributed is fundamental in financial accounting and provides insight into a company's financial strategy.