Retained earnings vs net income
Each, defined
Retained earnings
Retained earnings — Accumulated net income not distributed to owners — where the P&L lands on the balance sheet.
Net income
Net income — Revenues and gains less expenses and losses, including income tax, for the period — the bottom line of the P&L, before any allocation to non-controlling interests.
Side by side
| Retained earnings | Net income | |
|---|---|---|
| Statement | Balance sheet, equity | Income statement |
| Period | Cumulative, since inception | One period |
| Moved by | Net income, dividends, prior-period adjustments | Revenue and expenses |
The retained earnings roll-forward
A company opens the year with $420,000 of retained earnings, earns $310,000 and pays $50,000 of dividends. It closes with $680,000.
| Line | Amount |
|---|---|
| Opening retained earnings | 420,000.00 |
| Net income for the year | 310,000.00 |
| Dividends | (50,000.00) |
| Closing retained earnings | 680,000.00 |
How they relate
Net income lives on the income statement and starts again at zero each year. Retained earnings lives in equity and carries forward, increased by profits and reduced by losses and dividends.
A startup that has lost money every year shows an accumulated deficit: negative retained earnings, offset in equity by paid-in capital.
Questions
- Is retained earnings cash?
- No. It is an equity balance; the cash may long since have been spent.
- Can retained earnings be negative?
- Yes — when cumulative losses exceed cumulative profits. It is then called an accumulated deficit.
See it computed
Worked through: the calculators, the journal entries and the tools that use these terms.
- Journal entry for closing entriesAt the end of the fiscal year, debit every revenue account for its credit balance, credit every expense account for its debit balance, and take the difference — net income — to Retained earnings. Revenue and expense accounts start the new year at zero.Entry
- Journal entry for dividendsWhen dividends are declared, debit Dividends declared (or Retained earnings) and credit Dividends payable. When paid, debit Dividends payable and credit Cash. At year-end, close Dividends declared to Retained earnings.Entry
Definitions are the glossary’s, generated from the same documents. Figures in the examples are computed by tested functions, not typed. General information for US companies under US GAAP, not accounting or tax advice.