What exactly is retained earnings?
I mean i know the concept and all but i fail to see as to why is retained earnings not an asset?
You dont distribute a portion of net income so why treat it as equity?
It is a part of the cash pool that the company holds isnt it?
More specifically i fail to grasp the concept of keeping the retained earnings account same in acquisition method?
Why is retained earnings reported in the equity section of the balance sheet?
Because Retained Earning is only available to the common Stock holders of the company .It is not necessary that is the core Cash as we are following accrual accounting while recognising the revenue in I/S & at the same time added an asset in the B/s as A/c receivables . So it is better is show the Retained Earning on the Balance Sheet under Equity …
Hope this will help you…
Because Retained Earning is only available to the common Stock holders of the company
what do you mean by this?
just like every other asset it is going to be used in the projects going forward. So what does your statement actually mean?
Your assets are a claim to either third parties (Liabilities) or the company owners (Equity).
It basically tells you that this much amount is used to buy some of the company’s assets, from it’s previous earnings, and earnings is owned by the company.
The asset side of the balance sheet are materials you own that give you economic benefit. The Liability and Equity side of the balance sheet is the financing distibution of the company, it shows who owns how much rather than owns what.
It’s also kind of like a track record of company profitability that is a sign of strength and thus future success. Similar to a strong dividend.