Which of the following describes the classification and normal balance of the Retained Earnings account? Group of answer choices Asset, debit Equity, credit Revenues, credit Expense, debit
Question
Which of the following describes the classification and normal balance of the Retained Earnings account? Group of answer choices
Asset, debit
Equity, credit
Revenues, credit
Expense, debit
Solution
The classification and normal balance of the Retained Earnings account is Equity, credit.
Here's why:
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Retained Earnings is an equity account that represents the accumulated net income of a company that is retained by the company rather than distributed to shareholders as dividends.
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In other words, it's the portion of net profits which is saved and accumulated over the years.
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As an equity account, increases to Retained Earnings are recorded as credits and decreases are recorded as debits.
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Therefore, the normal balance of the Retained Earnings account is a credit balance. This means that if you add up all the debits and credits to the account, a positive balance would be a credit balance.
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