Cash vs Retained Earnings

[rentb23]

Hello,

Sorry i'm a beginner in accounting and i apologies if this question may sound silly.

What is the difference between cash in current assets and retained earnings? In my mind, retained earnings are also cash in the bank account or am I mistaken?

I am asking from a small business perspective.

Thanks,

 

[bklynboy]

Retained earnings is the accumulated profits of a company. Has nothing to do with cash. What gives you the impression its cash? These are the "earnings" a company has "retained" and not paid out as a dividend. Hence the name.

 

[Triest123]

Hello,

Sorry i'm a beginner in accounting and i apologies if this question may sound silly.

What is the difference between cash in current assets and retained earnings? In my mind, retained earnings are also cash in the bank account or am I mistaken?

I am asking from a small business perspective.

Thanks,

=> As retained profit might contains some non-cash items (such as depreciation,
stock provision, unrealised gain / loss on revaluation of the fixed assets, etc)

Also, the income statement is prepared on the "accrual basis" rather than on
cash basis, that means the revenue is recognised when the goods is delivered
to the customers or the service is rendered, the expenses are recognised when
they are incurred. They are irrelevant to the money is received or paid.

You should buy a accounting book for further understanding!!!!

 

[Fred Johnston]

bklynboy, the question is reasonable and your reply is assumptive and not at all helpful. To say that Retained Earnings has nothing to do with cash is just plain incorrect. In the simplest case it MAY simply be cash - you don't know and can't say, without knowing what went into the account (such as cash earnings, depreciation, amortization, etc.) and what came out (dividends, bonuses, etc.). If you are going to respond to a post it would be more helpful if you made more of an effort to be objective, thoughtful and helpful instead of being flippant and not even necessarily correct.

Triest123, Your reply is also not very helpful, at all. The poster indicates that they are a beginner. If you don't have the time to expand upon your explanation then why bother posting at all? And your knowledge of English grammar does not give one much confidence that your knowledge of accounting is any better. (when the goods is received?, to the money is received?). One might suggest that you should "buy a grammar book for further understanding!!!". Being critical of someone who posts a question is arrogant and simply not necessary.

I continue to be amazed and dismayed by people who post replies to valid or reasonable questions but who have nothing useful to contribute to understanding the question or providing an objective answer or explanation. Thumper the rabbit said "If you can't say something nice, don't say nothin' at all!". I would extrapolate this and suggest that "If you can't contribute anything useful to answering or at least shedding more light on the question, don't say nothin' at all". And, yes,, I note that this post is quite old now, however, it still comes up when searching this topic, and strangely enough there is still no useful or well thought out response (including mine at this point, obviously). I will try to find time to provide a proper response in the near future.

 

[Edward Cowling]

Hello,

Sorry i'm a beginner in accounting and i apologies if this question may sound silly.

What is the difference between cash in current assets and retained earnings? In my mind, retained earnings are also cash in the bank account or am I mistaken?

I am asking from a small business perspective.

Thanks,

Hi,
I can see where you're coming from. If you're making a nice profit, you should be generating cash and if you aren't, where is it going?
This used to be tracked on the good old Source and Application of Funds Statement, now generally called the Cash Flow Statement, just to confuse people A useful tool when reviewing the end of year accounts. Large organisations tend to have accounting software that flags items that do and don't involve cash.
So your highly profitable company has a huge profit, but cash is about the same as the previous year. You might feel entitled to ask your accounts guy to explain it. The cash flow statement will show you.
Some maybe went to buy assets. Maybe being so successful, you let credit control slip and you're funding a lot of additional debtors. That happens and needs urgent attention. Creditors too. Are you paying them quicker because you now have cash in the bank. Be consistent with creditor and debtor days, or you'll run into problems.
You get the idea? Your question is sensible and yes, in theory cash should equal profit. Sadly I've seen many profitable companies go under because of poor credit control. Don't fund your debtors

Hope this helps

 

[Larry Bailey]

I am surprised that you have not received a clear and informative response to your question. I will try. On your P&L, lets say you show Income from sales of $1,000 and Expenses (including income taxes etc) of $400. If the income exceeds your expenses, in this case $600, the resulting number is your Net Income...or Earnings.

Now, lets say you are on the accrual basis and you sold the $1,000 of merchandise on credit and have not received the funds yet. The sales is still recorded as Income on the P&L. No cash, however, is involved at all at this point.

The $1,000 owed to you from the sale will be recorded as an Asset in Accounts receivable on the Balance Sheet and the $600 Net Income will be shown as a Liability in Retained Earnings. Retained Earnings is the accumulated Net Incomes from you P&L less Dividends paid, if any. To account for the $400 in expenses, either you reduced inventory or you set up an Accounts Payable for the merchandise you sold but have yet paid for and and Accounts Payable to the IRS. Your Balance sheet now shows Liabilities of $400 in A/P and $600 in Retained Earnings...totaling $1,000 which equals your Assets of $1,000 Account Receivable.

I hope this helps.

I agree that smart a&& replies and snarky comments have no place on this Board.