Restricted retained earnings refers to that amount of a company's retained earnings that are not available for distribution to shareholders as dividends. The primary reason why retained earnings are restricted is that a company is in arrears in its payment of dividends that were due in the past; if so, the amount of the restriction will match the cumulative amount of unpaid dividends. The restriction will then decline as the dividends are paid off.
It is possible that the board of directors of a business will vote to restrict other portions of retained earnings that do not relate to cumulative unpaid dividends, such as for funds to construct a building. However, these restrictions may not be legally binding if investors are determined to be paid a dividend.
The accounting for restricted retained earnings is to move the designated amount into a restricted retained earnings account, which is still part of the equity cluster of general ledger accounts. The amount of any restricted retained earnings should be stated separately as a line item on the balance sheet, and should also be stated in the disclosures that accompany the financial statements.
Restricted retained earnings is also known as restricted surplus.