Retained earnings are the accumulated profits a business has kept instead of distributing.
How the figure moves
Profit for the year increases it. Distributions to owners reduce it. A loss reduces it.
It is cumulative, running from the first year of trading, which is why it is one of the few figures on the balance sheet that describes the whole history of the business rather than one period.
It is not cash
This is the most common misreading. Retained earnings record profit that was kept; they say nothing about what form it was kept in.
Profit retained and then spent on a van, on inventory, or on paying down a loan is still retained earnings, and none of it is available to spend. The bank balance is a separate figure — see real cash balance and profit and cash.
A negative balance
Accumulated losses, or distributions taken beyond accumulated profit, produce a negative figure. It means the business has paid out or lost more than it has ever earned.
This matters to lenders, because it feeds debt to equity directly.