Normal balance of retained earnings definition

What is the Normal Balance of Retained Earnings?

The normal balance in the retained earnings account is a credit . This balance signifies that a business has generated an aggregate profit over its life. However, the amount of the retained earnings balance could be relatively low even for a financially healthy company, since dividends are paid out from this account. Consequently, the amount of the credit balance does not necessarily indicate the relative success of a business.

When the balance in the retained earnings account is negative, this can indicate two possible situations, which are as follows:

Aggregate loss . A negative account balance most commonly indicates that a business has generated an aggregate loss over its life. This is especially common during the startup years of a business, when it may incur sustained losses before the entity has accumulated enough customers and released enough products to ensure itself of a reasonable profit.
Debt-funded dividend . Another possible reason for a negative account balance, though a rare one, is that a business has taken on a large amount of debt and then passed through some or all of this amount to shareholders in the form of a dividend. This situation most commonly arises when a business is acquired by a private equity firm, which takes out funds in the form of dividends in order to minimize its cash investment in the acquiree.