Retained earnings are the accumulated net profits that have been kept in the business rather than distributed to owners as dividends or drawings.
Retained earnings represent the total accumulated profits of your business since inception, minus any dividends or distributions to owners. It is a component of equity on the balance sheet. Each year, your net profit is added to retained earnings, and any dividends paid are subtracted. Retained earnings fund business growth - they provide capital for investing in new equipment, hiring staff, expanding operations or building cash reserves without needing to borrow or raise external capital. A healthy retained earnings balance indicates a business that generates profits and reinvests them wisely. Negative retained earnings (accumulated deficit) indicates the business has generated more losses than profits over its lifetime. For sole traders and partnerships, retained earnings is often replaced by the owner's equity account, which tracks capital contributions, drawings and accumulated profits. SortBooks ensures retained earnings are accurately calculated by correctly tracking all revenue, expenses and owner transactions in Xero.
SortBooks helps with the bookkeeping behind retained earnings by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing retained earnings by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
Equity represents the owner's residual interest in the business after all liabilities are deducted from assets. It includes contributed capital, retained earnings and reserves.
Net profit (also called net income or the bottom line) is your total revenue minus all expenses, including COGS, operating expenses, interest and tax. It is the final profit figure.
A dividend is a distribution of profits from a company to its shareholders. It reduces the company's retained earnings and represents a return on the shareholders' investment.
The balance sheet is a financial statement that shows your business's assets, liabilities and equity at a specific point in time. It follows the equation: Assets = Liabilities + Equity.
The P&L (also called the income statement) shows your business revenue, expenses and resulting profit or loss over a specific period.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.