As a financial expert with a deep understanding of accounting principles, I can provide a comprehensive explanation of the concepts of retained earnings and net assets, and how they differ.
Retained earnings are a part of the equity section of a company's balance sheet. They represent the cumulative net income that a company has retained, rather than distributed to its shareholders as dividends. This amount is essentially the earnings that have been "retained" or kept within the company for reinvestment or other corporate purposes. Retained earnings are calculated by adding up all the profits that a company has made since its inception, after deducting any dividends that have been paid out. They are a key indicator of a company's financial health and its ability to sustain and grow its operations without relying on external financing.
On the other hand, net assets are a measure used primarily in not-for-profit organizations and government entities. Net assets are calculated by subtracting an entity's liabilities from its assets. In the context of a non-profit, net assets are often referred to as "funds" and are used to reflect the financial health of the organization. Unlike retained earnings, net assets do not specifically represent the accumulated profits of an entity. Instead, they represent the total value of the entity's assets that are available to further its mission or objectives.
Here are some key differences between retained earnings and net assets:

1. Purpose: Retained earnings are used by for-profit companies to indicate how much profit has been reinvested in the company, while net assets are used by non-profits and government entities to show the value of assets available for their mission.

2. Calculation: Retained earnings are calculated as cumulative net income minus dividends, whereas net assets are calculated as total assets minus total liabilities.

3. Distribution: In the case of for-profit companies, retained earnings can be distributed to shareholders as dividends, but in the case of non-profits, net assets are not distributed; they are used to support the organization's activities.

4. Reporting: For-profit companies report retained earnings on their balance sheet under shareholders' equity, while non-profit organizations report net assets on their balance sheet as a separate line item, not under an owner's equity section since they do not have shareholders.

5. Ownership: Retained earnings are part of the owners' equity in a for-profit company, reflecting the owners' claim on the company's assets after all liabilities have been paid. Net assets, in contrast, do not represent ownership but rather the financial resources available to the non-profit to fulfill its objectives.

6. Legal Structure: The concept of retained earnings is more relevant to entities with shareholders, such as corporations. Net assets are more relevant to entities without shareholders, such as non-profit organizations and government entities.
In conclusion, while both retained earnings and net assets are financial metrics that provide insight into an entity's financial health, they serve different purposes and are calculated differently. Retained earnings are specific to for-profit companies and represent the portion of profits that are retained for the company's use, whereas net assets are a broader measure used by non-profit organizations and government entities to reflect the value of their assets in furtherance of their missions.
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A basic concept in the non-profit world is the net asset. Stated simply, a net asset is assets less liabilities. Net assets also are called funds. Instead of showing retained earnings or owner's equity, the non-profit financial statements show net assets.read more >>