Does an increase in Retained Earnings mean an equal amount of increase in the asset side of the balance sheet?
Hi all, I want to ask a very simple question but it has long been on my mind and confused me.
When a firm earns profit and deducts the potential dividend payments from it, the remaining amount or Reatined Earnings are added into Accumulated Retained Earnings section of the Stockholder's Equity. This causes a net increase in the amount of StockHolders Equity by the Retained Earning Amount. To balance the Accounting Equation, Balance sheet needs to adjust itself by debiting the Asset side of the company right or is it possible that Liability side of the company decreases and asset side increaases to balance new addition into Retained Earnings? As far as I know, the only side to increase as a result of increase in Retained earnings is the Asset side(either Cash or A/R or PP&E) to offset the increase in Stockholders Equity, otherwise having profit would have no effect on Balance Sheet expansion or company growth. If you guys can help regarding the validity of this, I will appreciate. Thank you.
Paragraphs are lovely....
Liabilities could fall due to revaluations of liabilities which would be extraordinary items on the income statement but still contribute towards retained earnings.
Thank you very much Asatar. :) So you confirm that the asset side of the company should update itself by increasing in the same amount as Retained earnings to balance the BS, assuming we have no revalaution of liabilities.
Assuming no changes in liabilities, the assets must change the same amount as equity. However, management may decide to, for example, pay down debt using cash they earned. In that case assets and liabilities would decline.
Yes, either an increase in assets of some kind or an equal decrease in liabilities/shareholders' equity to balance the increase in RE.
Thank you very much BlackHat and Inkybinky. Your answers are all appreciated. ;)
No it doesn't hit any other account on your balance sheet. There is a special account called Income Summary that is used for this entry.
Dr. Revenue Cr. Income Summary
Dr. Income Summary Cr. Expenses
Net balance in Income Summary is Net Income at this point, which say is 1000 in revenues - 500 in expenses = 500.
Dr. Income Summary Cr. Retained Earnings
Can't tell if this is sarcasm or if you need to retake accounting 101.
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