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For the business, distributions show up on the balance sheet section of your tax return (total distributions since the company started) and in Section M-1, which shows distributions that have been made through the year.

Distributions represent a portion of the profits a company decides to give to its shareholders, while retained earnings represent the portion of profits that a company chooses to keep. Companies choose to share profits in the form of dividends because it encourages shareholders to continue investing in the company.

A dividend is a reward paid to shareholders for their investment in a company's equity. Rewards typically come from the business's net profits. Many C Corporations use dividends.

Retained earnings can be kept in a separate account and are tax-exempt until they are distributed as salary, dividends, or bonuses. Salary and bonuses can be deducted from corporate income tax, but are taxed at the individual level. Dividends are not tax-deductible.

Profits should be divided among the partners according to their share of the ownership, as specified in their partnership agreement. If there is no written or oral agreement among the partners, then under common law, each partner is to receive equal profits and losses.

To record an owner withdrawal, the journal entry should debit the owner's equity account and credit cash. Since only balance sheet accounts are involved (cash and owner's equity), owner withdrawals do not affect net income.

The retained earnings are calculated by adding net income to (or subtracting net losses from) the previous term's retained earnings and then subtracting any net dividend(s) paid to the shareholders. The figure is calculated at the end of each accounting period (monthly/quarterly/annually).

Cash Distributions and Equity When a company declares a distribution payable to shareholders, the declaration directly affects the retained-earnings account under the shareholder-equity section of the balance sheet.

Still, in the vast majority of cases, companies can't pay dividends that exceed their retained earnings. Dividend investors should therefore keep an eye on the balance sheets of the companies whose stock they own to get an early warning of any potential problem with paying dividends in the future.

Subtract your business's expenses and operating costs from your total revenue. This calculates your business's earnings before tax. Deduct taxes from this amount to find you business's net income. Your net income will be your business income.