Negative retained earnings can impact a business's ability to pay dividends to shareholders. If negative retained earnings aren't corrected, it can reduce company equity. Over time, negative retained earnings can put a business at risk for bankruptcy.

Is it bad to have negative retained earnings?

Negative retained earnings harm the business and its shareholders, as well as decrease shareholders' equity. Besides being unable to pay dividends to shareholders, a company that has accumulated a deficit that exceeds owner's investments is at risk of bankruptcy.

Should retained earnings be a debit or credit?

The normal balance in the retained earnings account is a credit. This balance signifies that a business has generated an aggregate profit over its life. However, the amount of the retained earnings balance could be relatively low even for a financially healthy company, since dividends are paid out from this account.