can i ask a question this chapter is dealing where we get finanace but in demerits of retaind earning we saw that its uncertain sources of finance it also that due to check towards profit but why its an demerit and why it cant be in the rows of merits
Dear student,
Retained earning is part of profit that is retained after distributing dividends to shareholders. Some of the merits of retained earnings are that it leads to increase in price of equity shares, it acts as a permanent source of finance, it involves no dilution of control, it does not create any charge on assets, etc. One of demerit of retained earning is that it is uncertain source of finance, as business operates in a dynamic environment, its profits are never certain and as profit are uncertain so retained earning is also an uncertain source of finance as it is part of profit left after payment of dividend to shareholders.
Regards
Retained earning is part of profit that is retained after distributing dividends to shareholders. Some of the merits of retained earnings are that it leads to increase in price of equity shares, it acts as a permanent source of finance, it involves no dilution of control, it does not create any charge on assets, etc. One of demerit of retained earning is that it is uncertain source of finance, as business operates in a dynamic environment, its profits are never certain and as profit are uncertain so retained earning is also an uncertain source of finance as it is part of profit left after payment of dividend to shareholders.
Regards