Financial statements provide crucial financial and operational performance indicators regarding a company's health. Two key line items, profit and retained profits, demonstrate a company's profitability level and how well it uses its own resources to grow. Profit appears on the income statement and cash flow statement. Retained profits show up on the balance sheet and cash flow statement.

Net Profit

Net profit, generally referred to as net income and sometimes as net earnings, is the amount of money your company made during the specified period, typically a month, quarter or year. If the company lost money during the period, this is referred to as a net loss. When someone refers to a company's "bottom line," that person is referring to the company's net profit.


Profit can refer to both gross profit and net profit, both of which appear on the income statement. Gross profit appears towards the top of the income statement and is determined by deducting a company’s cost of goods sold or costs of services delivered from its gross revenues. Conversely, net profit appears at the bottom of the income statement. To calculate net profit, deduct all of your company's expense, including cost of goods sold, operating expenses, depreciation and income taxes from its gross revenues.

Retained Earnings

Retained earnings, or retained profits, are the net income your company generates that are retained by your company and not distributed to the owners. Retained earnings are either reinvested in the company to assist with stabilization and expansion or retained to strengthen the company's balance sheet. Profits retained by the company become equity and appear on the balance sheet as a component of owners' equity. Specifically, owners' equity includes initial investment capital, additional paid-in capital and retained earnings.

Financial Statements

All of the net profit rolls over into retained earnings less any dividends or distributions you take as an owner. Specifically, the net profit shown on your company's income statement at the end of one accounting period becomes a part of retained earnings shown on your balance sheet at the beginning of another accounting period.


For example, assume your business generated $300,000 in net profit as of December 31 of the last fiscal year. Your company opts to retain all its profits at this time and not distribute to owners. At the very beginning of the next fiscal year, January 1, your net profit is $0. However, your January 1 balance sheet shows an increase of $300,000 in its retained profits.