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Do You Have a Solid Grasp of Your Retained Earnings?

October 2, 2018 by OSYB Staff

Let’s start with a defintion of retained earnings, Intuit QuickBooks shares, “retained earnings are defined as the sum of all company profit since business inception, less all earnings payments to owners since inception.”  You need to know your retained earnings because it is a key metric that will help you measure your small business’s long term profitability.  Your retained earnings can be found in your balance sheet.

Your balance sheet shows details of these 3 categories which are components of the balance sheet formula which is Assets – liabilities = equity.:

  1. Assets
  2. Liabilities
  3. Equity

Remember:  “The balance sheet formula must stay in balance, regardless of the number of transactions posted, or the dollar amount of accounting activity.”

You need to consider profit, which is net income and is calculated as revenue less expenses, and net income is reported in your income statement.  Your net income of the year is posted to the equity section of the balance sheet as an increase to retained earnings.

As a business owner, you may chose to distribute your company’s profits in the form of dividends or an owner’s draw or you may chose to leave the profits in the business as retained earnings.  Keep in mind that your choices have tax implications.

As a business owner, you have to weigh the value of your work  and how much of your profits you want to maintain in the growth of your business.  Keep in mind that the” total dollar amount of profits kept in the company is your retained earnings balance”.  It is imperative that you fully comprehend your retained earnings, the choices you can make to utilize your company’s profits and the tax implications of your choices.

You should keep in mind that “retained earnings balance is the true value of your business, so keep accurate records of this important account balance”.

For detailed information:  Retained Earnings

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