Which Types Of Accounts Affect Retained Earnings Account

Retained Earnings Is Affected By Which Kinds / Types Of Accounts And What Are The Major Key Factors Which Cause Retained Earnings To Increase Or Decrease? / What Is The Effect Of Net Income / Expenses / Revenues And Dividends On It?

Retained Earnings Account is a Permanent Account or Balance Sheet Account and it is a part of equity account. It is used to expand, grow and to Stabilize The Business.

Retained earnings is mostly affected by four (4) types of accounts which are discussed below:

(i) Revenue Accounts

Revenue accounts positively affect the retained earnings. Revenue accounts are added to retained earnings as these accounts also have normal balance on credit side as retained earnings that is why retained earnings account increases i.e., credit plus credit are added and the account balance of retained earnings surely increases.

(ii) Expense Accounts

Expenses accounts negatively affect the retained earnings accounts as it is unfavorable for it i.e., expense accounts have usual debit balance which is opposite to retained earnings account, so we deduct expense accounts from retained earnings account and as a result, its account balance decreases i.e., credit plus debit are deducted or subtracted.

(iii) Net Income Or Net Profit Account / Net Loss Account

The difference between revenues and expenses results either in the form of Net Income / Net Profit or Net Loss. The excess of revenues over expenses is Net Income and the excess of expenses over revenues is Net Loss.

In case of Net Income or Net Profit, the retained earnings account increases as net income is added to it i.e., net income has normal or positive balance on credit side, so it increases it.

On the other hand, net loss account decreases the account balance of retained earnings account as it has normal debit balance i.e., opposite to retained earnings account, so it is deducted from retained earnings.

(iv) Dividend Account

Dividend account also negatively affects the retained earnings account as it is paid to shareholders or stockholders only when the company or corporation earns net profit or net income for the accounting period. As dividend account has normal debit balance which is opposite to retained earnings, so it is deducted from retained earnings.