What happens to retained earnings when net income increases from a sale of assets?

When net income increases from the sale of assets, retained earnings are impacted positively, leading to an increase by the gain amount linked to that income. Retained earnings represent the cumulative amount of net income that a company has retained in the business rather than distributed as dividends. When a company realizes a gain from selling assets, this gain contributes to the overall net income for the period.

As net income is determined, it is closed to the retained earnings account at the end of the accounting period, reflecting an increase. Therefore, if the company sells an asset and records a gain, that gain increases the net income for that period, resulting in a corresponding increase in retained earnings. This mechanism shows how successful asset sales can enhance a company's retained earnings, reinforcing the organization's financial strength for future investments or distributions.