Retained earnings is the cumulative profit kept in the business since incorporation; cash is what is actually in the bank, and they are rarely the same number.

Retained earnings grows every time the business profits andshrinks through losses or dividends. Over years of operation, it accumulates into a significant balance sheet figure. But that figure reflects cumulative accounting profit, not accessible funds. The profits it represents have been deployed into the business over time: into receivables, equipment, inventory, and other assets.

An owner who sees $750,000 in retained earnings and assumes that amount is available to distribute, invest, or spend has fundamentally misread the balance sheet. Cash available for distribution is determined by the actual bank balance, the working capital needs of the business, and upcoming obligations, not by the equity section of the balance sheet.

Retained earnings is one of the most consistently misread figures on a business balance sheet. See how Wefinx approaches accounting.

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