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Retained Earnings Lecture Notes

Retained earnings refers to accumulated profits of a corporation. It can have a debit balance called a deficit. Retained earnings is classified as unappropriated, which is available for dividends, or appropriated for specific purposes like treasury stock or contingencies. When appropriating retained earnings, an entry debits retained earnings and credits the appropriation. If the appropriation is no longer needed, an reversing entry is made. Dividends can be paid out in cash using free retained earnings, shares of additional stock, scrip, or property.

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3K views

Retained Earnings Lecture Notes

Retained earnings refers to accumulated profits of a corporation. It can have a debit balance called a deficit. Retained earnings is classified as unappropriated, which is available for dividends, or appropriated for specific purposes like treasury stock or contingencies. When appropriating retained earnings, an entry debits retained earnings and credits the appropriation. If the appropriation is no longer needed, an reversing entry is made. Dividends can be paid out in cash using free retained earnings, shares of additional stock, scrip, or property.

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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 xx
Income Summary 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.)

• 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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