Retained Earnings Lecture Notes

RETAINED EARNINGS Closing the books: 1. Close all nominal accounts with debit and credit balances to income summary. 2. Close income summary to: If Net Profit: Income Summary xx Retained Earnings xx If Net Loss Retained Earnings Income Summary

xx xx

RETAINED EARNINGS • Retained Earnings refers to accumulated profits of the corporation • Debit balance in Retained Earnings is called Deficit. • Retained Earnings is classified into Unappropriated or Free and Appropropriated. o Unappropriated or Free Retained Earnings is available for dividend distribution. o Appropriated portion is set aside for a specific purpose of the corporation.  Appropriation of retained earnings may be for: a. legal appropriation ( if own shares of stock is acquired, sufficient retained earnings is required) b. contractual appropriation ( to insure eventual payment of bonds and preferred stock) c. voluntary or discretionary appropriation( discretion on the part of the management) 

Appropriations may be for: • Treasury stock • Plant Expansion • Contingencies • Sinking Fund

Journal Entry for appropriation of Retained Earnings: Retained Earnings xx Appropriated for Treasury Stock

xx

If the corporation is through with the appropriation, a reversal of entry previously prepared is needed. (for ex. Treasury stock was already sold) Appropriated for Treasury Stock

xx

Retained Earnings

xx

DIVIDENDS Dividends- distribution of corporate profits to stockholders. Types of dividends • Cash dividend – distribution of corporate profits in form of cash. ( sufficient cash is needed and available Free retained earnings) o Cash dividends maybe distributed as follows:  certain amount of peso per share.  certain percent of par or stated value. •

Stock dividend – distribution of corporate profits in form of corporation’s own shares of stock. (available unissued shares and Free retained earnings are required.)

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Scrip dividend - distribution of corporate profits in form of liability or promissory note. Property Dividend - distribution of corporate profits in form of non- assets or properties. corporation’s investment (shares of stock ) in another corporation

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