Final answer:
Retained earnings is a false representation as an asset account for dividends paid; it is an equity account reflecting profits reinvested in the company. This account is a part of the company's net worth or shareholder equity, not an asset. Retained earnings appear on the liabilities and net worth side of a T-account.
Step-by-step explanation:
The statement that retained earnings is an asset account representing the amount of dividends paid by a corporation is false. Retained earnings is actually an equity account that represents the cumulative amount of earnings that have been retained (reinvested) in the company rather than paid out as dividends. Retained earnings are found on the balance sheet, one of the key financial statements, and is part of a firm's net worth or shareholder equity. Since it is not an asset, retained earnings do not reflect the actual cash or other assets a company has; rather, it represents the portion of the company’s profits that is reinvested in the business or kept within the company to fund future growth or to pay down debt, rather than being distributed to shareholders as dividends.
Understanding the T-account, which is a basic accounting tool, helps clarify this. In a T-account, assets are listed on the left side, and liabilities and net worth (including retained earnings) are listed on the right side. The sum of a company's assets must always equal the sum of its liabilities plus net worth to keep the account balanced. Retained earnings would appear on the net worth side of a T-account, not as an asset.