Prove your mastery! Your results will report to the gradebook. If you are not ready to submit work for a grade, you can try activities again or attempt the Practice Mastery. Your work will be saved as you work through each part. Drag the account types to form the expanded accounting equation. Begin the equity section with Contributed Capital Retained Earnings. Then, identify whether the item increases, ' ', or decreases, '-', equity.

Retained earnings increases equity because profit that are left undistributed to shareholders form part of investments in the company by the shareholders. This means that the company has invested shareholder's fund in extending its operations.

Explanation:

This can also be explained by the following formula:

Assets = Equity + Liability

Assets = (Share Capital + Sale - Expenses - Dividend) + Liability

This equation says that the profits left undistributed, form part of the company's equity. Hence proved that the undistributed profits (Retained Earnings) increases equity of the company.

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