Knowing your accounting jargon is one of the most underrated basics of running a business. Many startup founders run with a business idea and then stumble because of the lack of accounting knowledge needed to run a business successfully.
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Retained earnings and net profits are two different financial terms, and failure to understand the distinction between them can lead to inaccurate decision-making. While the two terms are closely related, not knowing the difference between the two can lead to issues with spending and financial forecasts.
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Hiring a bookkeeper from the Gold Coast will help solve these issues. However, it’s also crucial for any business owner to grasp accounting basics well.
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What are Retained Earnings?
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Retained earnings are the cumulative net income of a business after dividends have been paid out to shareholders. This money is reinvested into the business to cover expenses and purchase assets.
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Retained earnings enable the business to finance growth and expansion without additional debt or equity. They also allow the company to cover unexpected expenses without resorting to outside financing.
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Companies use this money to purchase new equipment, hire additional staff, upgrade facilities, or fund research and development. They can also use retained earnings to pay dividends to shareholders later and increase the value of the company’s stock.
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Retained earnings also play an essential role in terms of financial stability. Healthy retained earnings can help a business weather economic downturns and remain competitive. Moreover, retained earnings are a crucial indicator of a business’s success and can be used to compare the performance of different companies. Healthy retained earnings can be substantial in attracting potential investors and customers.
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Business accountants record Retained Earnings on the balance sheet under shareholders’ equity. In some cases, bookkeepers include retained earnings on the income statement.
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What is Net Profit?
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On the other hand, net profit is the total amount of money a company has made after subtracting all expenses from its total revenue. It is the amount of money the company has made in a given period.
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Net profit is used to assess the success of a business over a given period, while retained earnings help gauge the company’s long-term financial performance. Both net profit and retained earnings are essential metrics for businesses to track as they indicate the company’s financial position and can be used to make decisions about allocating resources.
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In other words, net income is the amount of money a business has made in a given period minus all expenses. Retained earnings are the amount of money from the business’s net income after paying dividends to their investors, plus any accumulated earnings from the previous period. It is possible to have a positive net income but negative retained earnings or vice versa.
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Conclusion
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In conclusion, understanding the difference between retained earnings and net profit is essential for businesses to make intelligent financial decisions. If you’re having trouble deciphering the relationship between the two terms and how they affect your business, check in with a Gold Coast business accountant you can trust.
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Here at New Wave Accounting, we help businesses minimise taxes and maximise profits! Schedule a meeting with us today to get acquainted with a ,Gold Coast accountant near you.
