Retained Earnings vs Owner’s Equity

One of the best things that you can do for your business is to understand financial statements. One of the biggest issues that come with reading financial statements is understanding the differences between Retained Earnings vs Owner’s Equity. The first step is defining the two.

Retained Earnings is the company’s net income or loss over the period of the company. The net income will also include the difference in any dividends that might be paid out.

Owner’s Equity is the portion of the company’s assets that an owner can claim. It is basically the result of your assets subtracting any liabilities in the company.

Both accounts are very important but both accounts tell a different story. For example. A positive owner’s equity shows that the company is in good standing and growing. The negative owner’s equity will happen if your liabilities outweigh your assets. This often happens if the company has any loans. It can be understandable during a short period of time, especially during a company’s growth, but it is something to keep monitoring as it indicates distress in the company’s financial situation.

Retained Earnings is important because it allows you to see the profit after everything. This amount will fluctuate depending on your business history. This number is important because it allows you to make managerial decisions as well as helping banks make decisions on loans. Retained Earnings, depending on the size of the business, may be used to distribute to the shareholders. However, the company may choose to invest the earnings back into the company to ensure further growth and strengthening of the business.