Question

Consider the following account starting balances and journal transactions involving these accounts.
Use T-accounts to record the starting balances and organize the offsetting entries for the transactions.

The starting balance of Cash is $9,100
The starting balance of Inventory is $4,800
The starting balance of Retained Earnings is $24,700

Date	Accounts and Explanation	Debit	Credit
Mar 9	Cash	30
	Inventory		24
	Retained Earnings		6
	Sold and delivered product to customer
Mar 10	Cash	40
	Retained Earnings		40
	Sold, delivered, and received payment for service with no clear associated cost
Mar 11	Retained Earnings	2
	Cash		2
	Consumed good or service and paid expense with cash

What is the final amount in Retained Earnings?

Answer 1

The opening balance of Retained Earnings is $24,700.

Few points that must be kept in mind while arriving at the final amount of Retained Earnings

• Retained Earnings are the Profits earned by a company
• It is recorded under Shareholder's Equity in the balance sheet
• The normal balance of retained earnings account is Credit. It means the company has earned profit.
• When the balance of retained earnings is negative it means company has incurred a loss.

In the question given above the opening balance of Retained Earnings is $24,700 which means it has earned profit.

Now we need to look at the Journal Entries to arrive at the Final Amount in Retained Earnings

The Journal Entry made on March 9 is Profit on Sale of Inventory.

Inventory worth $24 is sold for $30 and cash is received. Here the company has made a Profit of $6 thus Retained Earnings will increase by $6.

The Journal Entry made on March 10 shows a Profit of $40 made by the company as there was no clear associated costs. Thus Retained Earnings will increase by $40.

The Journal Entry made on March 11 shows loss of $2. Thus Retained Earnings have been debited and the balanec of Retained Earnings will reduce by $2.

Therefore the Final Amount in Retained Earnings would be

$24,700 + $6 + $40 - $2

=$24,744