Intermediate Accounting (16th Edition)

Published by Wiley
ISBN 10: 1118743202
ISBN 13: 978-1-11874-320-1

Chapter 5 - Balance Sheet and Statement of Cash Flows - Review and Practice - Questions - Page 238: 19


From the understanding of retained earnings, Battle is incorrect since retained earnings are sources of assets; however, its not an asset on itself. For instance, even though the funds are obtained from issuing a note payable are invested in the business, the note payable is not reported as an asset. Its a source of an asset but its not reported as a liability because the company has an obligation to repay the note in the future.

Work Step by Step

In the same manner, even though the earnings are invested in a business, retained earnings are not assets. They are reported as part of shareholder's equity because it is in effect an investment owner which increases the ownership interest in the assets of an entity.
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