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Are retained earnings an asset?

Generally, the amount of a corporation's retained earnings is the cumulative net income since the corporation began minus all of the dividends that the corporation has declared since it began. The amounts are recorded in the Retained Earnings account, which is reported in the Stockholders' Equity section of the corporation's balance sheet.

While the amount of retained earnings is reported in the stockholders' equity section of the balance sheet (and in the accounting equation), the retained earnings are probably invested in assets that are also reported on the balance sheet. For example, let's assume that you start a corporation to provide website consulting services. You invest $500 in the corporation, and immediately find a client who pays you $4,000 for your services. Your corporation's Cash is now $4,500 which equals the Paid-in Capital of $500 plus the Retained Earnings of $4,000. On the next day, you spend $3,500 to acquire a computer and other equipment for your corporation plus $300 of supplies. Right after these items are purchased, your corporation will report $700 of Cash + $300 of Supplies + $3,500 of Equipment = Stockholders' Equity of $4,500—of which $4,000 is Retained Earnings.

The Retained Earnings amount is clearly reported as part of Stockholders' Equity, but the amount is usually invested in assets or used to reduce liabilities. Rarely will the retained earnings be entirely in cash. The retained earnings need to be invested in income producing assets or in the reduction of liabilities in order to earn a return for the stockholders, who have opted to reinvest their earnings in the corporation.