Retained earnings on the balance sheet is classified as which type of account?

• A. Asset
• B. Liability
• C. Equity
• D. Contra-equity

Answer: (C)

Retained earnings is an equity account that shows the cumulative amount of net income the company has kept in the business rather than distributed as dividends. On the balance sheet it sits in the stockholders’ equity section as part of the owners’ claims after accounting for liabilities. It increases with reported net income and decreases when dividends are paid. It isn’t an asset because it doesn’t represent a resource the company owns, and it isn’t a liability because it isn’t an obligation to pay someone. It also isn’t a contra-equity item, which would subtract from total equity (likeTreasury stock would). So, retained earnings is classified as equity.