Revenue and retained earnings are two terms that one will usually see when reading the financial statements. Revenue forms an important part of the income statement, and it will also appear in the company’s balance sheet. Retained earnings, on the other hand, is the bottom line of an income statement and the accountants from an accounting firm in Johor Bahru will move them to the balance sheet under the shareholder’s equity part.

While revenue shows the income that the company has earned by selling goods and services, retained earnings are the net income that the company retains. Both are important and helpful when investors want to evaluate the financial management of a company. Revenue can reflect the demand for the products or services the company offers to its customer. On the other hand, to calculate the sum of retained earnings, the accountants need to use the figure of net income which can be found in the profit and loss statement. Then, they need to report retained earnings in the company’s balance sheet.

In the profit and loss statement, one can find revenue at the top of the statement. Hence, when people are describing the financial performance of a company, they will often call the revenue as “top line”. This is the income that a business has earned before any deductions of operating expenses, cost of goods sold, taxes and other expenses.

In most cases, people would take gross sales as the most important figure when it comes to the calculation of revenue. Gross sales show the sum of revenue the company (Also see What is a Company Constitution in Malaysia?) has generated from the selling prices of its goods and services after considering the direct cost of goods sold. Apart from gross sales, some prefer using net sales when evaluating the company’s revenue. To calculate net sales, one should deduct the cost of goods sold and any returns or exchanges of goods in a period from the company’s revenue.

On the other hand, retained earnings are part of the company’s profit that the company retains from its net income to be used in the future. Also, retained earnings are important in the shareholder’s equity part, and it helps in identifying the book value of a company. In the calculation of retained earnings, the accountants will need to know the company’s net income. This is the profit that the business has earned throughout a period. To calculate net income, one should deduct all the cost incurred from the revenue. People will usually call it the bottom line as it is situated at the bottom of the profit and loss statement.

At the end of a reporting period, the net income that the company does not pay out to its shareholders will become the company’s retained earnings. Then, the accountants (Also see Types of Accounting That You Should Know) will move the retained earnings to the company’s balance sheet and report them as the shareholder’s equity. Keep in mind that the retained earnings will be accumulated on in the balance sheet under the shareholder’s equity section. As soon as the accountants report the retained earnings on the balance sheet, they will be considered as part of the total book value of that company.

In short, there is a close relationship between revenue (Also see What Are the Types of Revenue Accounts?) and retained earnings (Also see Understanding Definition of Retained Earnings) as part of the revenue will become the company’s net income and lastly become its retained earnings. From the shareholder’s perspective, the sum of profit that the company keeps in the retained earnings is crucial as this reflects how well the company can earn positive net income and give the money back to the shareholders by distributing dividends to them.