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One of the common questions asked is about stockholder's equity. Explain the characteristics and functions of...

One of the common questions asked is about stockholder's equity. Explain the characteristics and functions of the retained earnings account and how the account is different from contributed.
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Answer #1

Retained earnings is the net income left over for the business in a year after paying off the dividends to its shareholders during the year. It is basically the earnings surplus of a company which is available to reinvest back into the business.

Contributed capital represents additional capital brought into the business by the Company by contributions from the shareholders of the company or by issuing additional shares in the company to obtain more capital. This is specifically done when a business is running into losses and to raise additional money a capital will be issued.

Whereas retained earnings is the surplus generated by the company during the year.

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