Generally Cause Retained Earnings to Increase or Decrease and its formula are as follows
Retained earning is the portion of total equity that is not paid as a dividend, but retained for further investment to earn profit.
It is comes in the credit side of the balance sheet. It shows the financial health of the firm. Growing company normally avoids to give dividend to its shareholders, so that they can use R.E for further investment in the business and grow their business.
Generally Cause Retained Earnings to Increase or Decrease + Formula
Business also kept R.E to cover up their future losses. Capital intensive industries and growing industries tends to retain more of their R.E as compared to other industries.
Beginning retain earning + net income/loss – cash dividend – stock dividend
When R.E debit (decreases)
- Net loss
- Overstatement of net income
- Cash and stock dividend
- Sale of treasury stock
When R.E credit (increases)
- Net income
- Understatement of net income.