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 even for a financially healthy company, since dividends are paid out from this account. Consequently, the amount of the credit balance does not necessarily 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.

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