Which of the following best describes the normal balances in stockholders' equity accounts?

• A. Common Stock has a credit balance; Retained Earnings has a debit balance.
• B. Common Stock and Retained Earnings have credit balances.
• C. Both Common Stock and Retained Earnings have debit balances.
• D. Common Stock has a debit balance; Retained Earnings has a credit balance.

Answer: (B)

Verified step by step guidance

1. Understand the concept of normal balances: In accounting, normal balances refer to the side (debit or credit) where increases in an account are recorded. For stockholders' equity accounts, increases are typically recorded on the credit side.
2. Review the components of stockholders' equity: Common Stock and Retained Earnings are both part of stockholders' equity. Common Stock represents the ownership interest of shareholders, while Retained Earnings represent accumulated profits that have not been distributed as dividends.
3. Determine the normal balance for Common Stock: Common Stock is a stockholders' equity account, and increases in equity accounts are recorded as credits. Therefore, the normal balance for Common Stock is a credit balance.
4. Determine the normal balance for Retained Earnings: Retained Earnings is also a stockholders' equity account. Since increases in equity accounts are recorded as credits, the normal balance for Retained Earnings is a credit balance.
5. Compare the options provided in the problem: Based on the analysis, the correct description is that both Common Stock and Retained Earnings have credit balances. This aligns with the principles of accounting for stockholders' equity accounts.