Small Business Management... retained earnings?

In reviewing the company’s balance sheet, Andy noticed that the total asset is stated as $5,500,000 and the total liability is $3,250,000. There is no paid-in capital or value for common stock. What are the company’s retained earnings?

a. Can’t determine with the information given
b. $2,250,000
c. $8,750,000
d. There is no retained earnings (?)


Any ideas?

b. $2,250,000

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The basic accounting equation is

Assets = Liabilities + Stockholders' Equity

Retained Earnings is an equity account, and the question information says that the other equity accounts have zero balances. Therefore Retained Earnings accounts for all of the Stockholders' Equity.

Rearranging the basic accounting equation,

Stockholders' Equity = Assets - Liabilities

= $ 5,500,000 - $ 3,250,000

= $ 2,250,000