The normal balance in retained earnings is credit: that is, retained earnings increase when credited and decrease when debited. A debit balance in the retained ...Whatareretainedearnings?Learnaboutretainedearningsandhowretainedearningsaredetermined.1.DefinitionofretainedearningsAsthenamesuggests,retainedearningsrepresentsincomethatwasretained(i.e.,kept,accumulated)bythecompany.Retainedearningsrepresentoneofthestockholders’equityaccounts:thatis,retainedearningsarereportedonthebalancesheet–aswellasthestatementofstockholders’equity.Ifretainedearningsrepresentretainedincome(orloss,ifnegative),whyitisnotreportedontheincomestatement?Remember,theincomestatement(alsocalled,statementofearnings)showstheresultsofoperationsofaparticularaccountingentityforaparticularperiodoftime(e.g.,thisfiscalyear)whilethebalancesheet(alsocalled,statementoffinancialposition)showsthefinancialconditionoftheentityasofaparticulardate.Asretainedearningsrepresentaccumulatedincomeasofaparticulardate,itmakessensetoreportretainedearningsonthebalancesheet.Importantly,retainedearningslinkthebalancesheettotheincomestatement:netincomeincreasesretainedearningswhilenetlossdecreasesretainedearnings.Retainedearningsareaffectedbynetincome(loss),cashandstockdividends,priorperiodadjustmentsforoverstatementorunderstatementofnetincome,anddisposaloftreasurystockbelowcost(seeIllustrationbelow):Thenormalbalanceinretainedearningsiscredit:thatis,retainedearningsincreasewhencreditedanddecreasewhendebited.Adebitbalanceintheretainedearningsaccountiscalledadeficit.Insomejurisdictions,incorporationlawsprohibitcompaniesfrompayingdividendswhenthereisadeficitbalanceintheretainedearningsaccount.Thereareaccountingproceduresthatcanbeusedtoeliminatethedeficit.Forexample,acompanymightbeabletoreclassifythedeficit(e.g.,decreaseadditionalpaid-incapitalandincreaseretainedearningsuptothezerobalance)oreliminatethedeficitthroughanaccountingreorganization(e.g.,write-upanassetorwrite-downaliabilitytoitsfairmarketvalue).Ingeneral,changesinreta