Retained Earnings vs Revenue: Definition, Formula, and Financial Statement Placement
Understanding the difference between retained earnings and revenues is crucial for mastering accounting, excelling in school and competitive exams, and making informed business decisions. These concepts reveal how a company's sales and profits are measured and highlight their impact on financial statements and business strategies.
| Basis of Difference | Retained Earnings | Revenue |
|---|---|---|
| Definition | Accumulated profits kept in the business after dividends are paid | Total income from sales during a specific period |
| Financial Statement Placement | Shown in shareholders’ equity on the Balance Sheet | Shown on the Income Statement (Profit and Loss Account) |
| Calculation Formula | Opening Retained Earnings + Net Profit − Dividends | Quantity Sold × Price per Unit |
| Timeframe | Accumulated since the company’s inception | Recorded for a specific accounting period |
| Significance | Helps analyze long-term financial health, reinvestment, or dividend capacity | Shows business activity, demand, and market size |
| Example | If a company earns ₹1 lakh net profit and pays ₹30,000 dividend, ₹70,000 adds to retained earnings | If a company sells 2,000 units at ₹50 each, revenue is ₹1,00,000 |
Difference Between Retained Earnings and Revenues
The primary difference between retained earnings and revenues lies in their definition and role within a business. Revenue refers to the total income earned from selling goods or services, typically recorded on the income statement for a specific period. Retained earnings, however, represent the cumulative profits kept in the company after deducting all expenses and paying out dividends. They are shown in shareholders’ equity on the balance sheet and indicate the amount reinvested in the company.
What Is Revenue?
Revenue, also known as sales or turnover, is the total amount of money a business earns from its primary activities like selling goods or providing services. Revenue appears at the top of the income statement and is a key indicator of business activity and demand in the market. Accurate revenue measurement is important for analyzing sales trends and business growth.
What Are Retained Earnings?
Retained earnings show the portion of net profits a company decides to keep instead of paying out as dividends to shareholders. Over time, these accumulated profits are used for reinvestment, paying off debts, or meeting unforeseen expenses, and they reflect the company's long-term financial strength. Retained earnings are found in the equity section of the balance sheet.
Formulas and Sample Calculations
| Type | Formula | Example |
|---|---|---|
| Revenue | Revenue = Quantity Sold × Price per Unit | 500 units × ₹200 = ₹1,00,000 |
| Retained Earnings | Closing Retained Earnings = Opening Retained Earnings + Net Income − Dividends | ₹40,000 + ₹12,000 − ₹4,000 = ₹48,000 |
Common Confusions: Revenue, Net Income, and Retained Earnings
- Revenue is not profit. Profit (net income) is revenue minus all expenses.
- Retained earnings are not the same as net income; they are the accumulated profits after dividends, over many years.
- Revenue shows sales activity while retained earnings show how much profit the company reinvests or keeps.
- Revenue goes on the income statement; retained earnings go on the balance sheet under shareholders’ equity.
- High revenue does not guarantee high retained earnings if expenses and dividends are also high.
Why Understanding These Concepts Matters
For students, knowing the difference between retained earnings and revenues is vital for answering MCQs, assertion-reason, and case-based questions in exams. These are also key for business decision-making and understanding company health and growth. At Vedantu, we simplify Commerce topics like these to help students succeed in board exams and beyond.
Interlinked Concepts and Further Reading
- Retained Earnings: Detailed explanation, use, and calculation methods.
- Balance Sheet: Placement of retained earnings and other equity components.
- Financial Statements of a Company: Structure and primary items.
- Accounting Period Concept: Why revenue is period-based and retained earnings accumulate.
- Profit and Loss Account and Balance Sheet: Statement differences and placement.
In summary, revenue reflects the sales generated in an accounting period, while retained earnings show profits accumulated and kept in the company after dividends over time. Understanding both is essential for analyzing a company's financial statements and for answering exam questions with confidence.
FAQs on Difference Between Retained Earnings and Revenues
1. What is the main difference between retained earnings and revenues?
Retained earnings represent accumulated profits kept by a company after paying expenses and dividends, shown on the balance sheet. Revenue, also known as sales or income, is the total money earned from sales during a specific period and is found on the income statement.
2. What is the difference between retained earnings and revenue?
Revenue is the total income generated from sales within a specific accounting period. Retained earnings, on the other hand, represent the accumulated profits a company has kept after deducting expenses and distributing dividends over several periods. They're a component of shareholders' equity. Understanding the difference is vital for analyzing a company's financial health and performing financial statement analysis.
3. What is the difference between earnings and revenue?
Revenue is the total amount earned from sales or services. Earnings (or net income) is what's left after all expenses are subtracted from revenue. Retained earnings are the accumulated earnings kept by the company after paying out dividends. The distinction between these three concepts is key to financial statement analysis.
4. Does revenue close to retained earnings?
No, revenue and retained earnings are distinct. Revenue is the total sales, while retained earnings are the cumulative profits kept by a company after considering expenses and dividend payouts. Revenue is a period-specific figure found on the income statement, while retained earnings reflect accumulated profits over time, shown on the balance sheet under shareholders' equity.
5. What is retained earnings on the balance sheet?
Retained earnings are a component of shareholders' equity, appearing on the balance sheet. They represent the accumulated profits a company has retained after paying all expenses and dividends. It's a key indicator of the company's financial strength and its ability to reinvest in future growth. This information is crucial for understanding a company's equity financing.
6. What is the difference between retained earnings and equity?
Retained earnings are a *part* of shareholders' equity. Shareholders' equity represents the total value of the company's assets belonging to the shareholders. Retained earnings show only the accumulated profits reinvested back into the business, not the total equity value which includes share capital, reserves, and other components.
7. How to calculate retained earnings?
The retained earnings formula is: Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings. Net income represents the company's profit after deducting all expenses. Dividends are the amount paid out to shareholders. Accurate retained earnings calculation is essential for financial statement analysis.
8. What is the formula for retained earnings?
The basic retained earnings formula is: Beginning Retained Earnings + Net Income - Dividends Paid = Ending Retained Earnings. This calculation helps determine the portion of profits that a company has reinvested in its business, which is part of its financial health. It's important for financial statement analysis and understanding a company's equity financing.
9. Can retained earnings be negative?
Yes, retained earnings can be negative. This occurs when a company's accumulated losses exceed its accumulated profits. This situation is often shown on the balance sheet and could raise investor concerns and influence their investment decisions. Such information is significant for financial statement analysis.
10. How do retained earnings impact shareholder equity and market value?
Positive retained earnings directly increase shareholders' equity, reflecting a stronger financial position. This often leads to a higher book value per share, potentially influencing market perceptions and the company's market value. However, other factors also impact market value.
11. Where are revenue and retained earnings shown in financial statements?
Revenue is reported on the income statement, reflecting the company's sales or services income. Retained earnings are a part of shareholders' equity and are displayed on the balance sheet. Both are integral components of a company's financial statements.
12. Is retained earnings the same as income or profit?
No, retained earnings are not the same as income or profit. While it's based on profit, it is the *cumulative* profit kept after deducting expenses and dividends across many periods, not just the current period's net income. The income statement shows the net income or loss for a given period, while retained earnings reflects the aggregate over time.
