Final answer:
The Retained Earnings account on a corporate balance sheet can have a negative balance when the company has accumulated losses, referred to as an accumulated deficit. The correct answer to the student's question is a) Negative, Deficit. This situation points to a company having been unprofitable over time.
Option 'a' is the correct.
Step-by-step explanation:
Under a corporate balance sheet, if a company has experienced losses, its Retained Earnings account could have a negative balance. This negative balance is indicative of the company having accumulated deficits from its operations. This condition is referred to as an accumulated deficit, which is the answer to the student's question. The correct option is therefore: a) Negative, Deficit.
The Retained Earnings account is a component of a company's equity on the balance sheet. It represents the cumulative amount of earnings that have been reinvested in the business rather than paid out as dividends to shareholders.
When a company has more losses than profits over time, it results in a negative Retained Earnings balance, or an accumulated deficit. This is not an ideal situation for a company, as it signifies that the company has been unprofitable over time and has been depleting its retained earnings to cover these losses.
The net worth or equity of a company is calculated by subtracting the total liabilities from the total assets. In a healthy business, net worth will be positive. However, in a firm that has gone bankrupt or is facing severe financial challenges, net worth could be negative, which impacts the Retained Earnings resulting in a negative balance.