Question

Kathleen Battle says, “Retained earnings should be reported as an asset, since it is earnings which are reinvested in the business.” How would you respond to Battle?

Short answer

Kathleen Battle is incorrect in saying that retained earnings should be reported as assets.

Step-by-step solution

Definition of Owner’s Equity

The capital investment made by the business entity owner is known as owner’s equity. It is determined by deducting the business’s liabilities from the assets held by the business.

Reason for the incorrect statement

Retained earnings cannot be reported as assets on the balance sheet because they are not assets but the source of the asset. Even if the retained earnings are invested in the operation of the business, they will not be reported as an asset. It is written as shareholder’s equity because it is an investment made in the business entity by the owner that will increase the ownership interest. Any contribution increasing the ownership interest is reported under shareholders equity.