The normal balance of retained earnings

The normal balance in the retained earnings account is a credit. This balance signifies that a business has generated an aggregate profit over its life. However, the amount of the retained earnings balance could be relatively low, since dividends are paid out from this account. Consequently, the amount of the credit balance does not indicate the relative success of a business.

When the balance in the retained earnings account is negative, this indicates that a business has generated an aggregate loss over its life. This is especially common during the startup years of a business, when it may incur sustained losses before the entity has accumulated enough customers and released enough products to ensure itself of a reasonable profit.