Question

Explain the following term/concept.

Ploughing back of profit

Answer 1

(a) Retained earnings are the earnings of the company which are retained (reinvested) in the business. The sum of those profits accumulated over years is re-invested in the business, rather than distributing it as a dividend to shareholders.
(b) It is the simple and cheapest method of raising funds. It is an important source of internal financing. Thus, it is also known as 'Self Financing' or 'Ploughing Back of Profits'.