RETAINED EARNINGS (ACCUMULATED PROFITS)

Closing the books:

1.Close all nominal accounts with debit and credit balances to income
summary.
2.Close income summary to:
If Net Income:
Income Summary xx
Accumulated Profits xx

If Net Loss
Accumulated Profits xx
Income Summary xx
ACCUMULATED PROFITS/RETAINED EARNINGS
• Accumulated Profits/Retained Earnings refers to accumulated profits of
the corporation
• Accumulated Profits/Retained earnings is a corporation’s cumulative
earnings since the corporation was formed minus any net loss incurred or
any dividends declared . In other words, this refers to the corporation’s
cumulative earnings that have not been distributed to its shareholders.
• Debit balance in Accumulated Profits/Retained Earnings is called Deficit
(Accumulated Losses)

• Accumulated Profits/Retained Earnings is classified into Unappropriated

or Free and Appropriated.
o Unappropriated or Free or Unrestricted
Accumulated Profits/Retained Earnings is available for dividend
distribution.

o Appropriated or Restricted portion is set aside for a specific purpose

of the corporation.
♣ Appropriation of accumulated profits/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
preference share)
c. voluntary or discretionary appropriation (discretion on the part
of the management)

♣ Appropriations may be for:

• Treasury shares
• Plant Expansion
• Contingencies
• Sinking Fund
 Journal Entry for appropriation of Accumulated Profits/Retained
Earnings:

Accumulated Profits xx
AP-Appropriated for Treasury Shares xx

If the corporation is done with the appropriation, a reversal of the entry

previously prepared is needed. (for ex. Treasury shares were
already sold)

AP-Appropriated for Treasury Shares xx

Accumulated Profits xx
 DIVIDENDS

Dividends- distribution of corporate profits to shareholders.

Three Significant dates during Dividends distribution

1.Date of Declaration
2.Date of Record
3.Date of Payment/Distribution

Types of dividends
1.CASH DIVIDEND
2. SHARE DIVIDEND (BONUS ISSUE)
3. SCRIP DIVIDEND
4. PROPERTY DIVIDEND
KINDS OF DIVIDENDS

1. Cash dividend – distribution of corporate profits in form of cash.

( sufficient cash is needed and available Free accumulated profits/
retained earnings)
o Cash dividends maybe distributed as follows:
♣ certain amount of peso per share.
♣ certain percent of par or stated value.

PROFORMA ENTRY

Date of Declaration:

Accumulated Profits xx
Cash dividends payable-Preference xx
Cash dividends payable- Ordinary xx
 Date of Record (No journal entry)

Date of Payment
Cash dividends payable-Preference xx
Cash dividends payable -Ordinary xx
Cash xx

2. Share dividend (Bonus Issue) – distribution of corporate profits

in form of corporation’s own shares of stock. (available unissued
shares and free accumulated profits/retained earnings are required.)
 Two types:
1. Small share dividend
i. Less than 20%
ii. Accumulated Profit is recorded at market value.

2.Large share dividend

i. 20% or more
ii.Accumulated Profit is recorded at par value.

PROFORMA ENTRY
a. Small share dividend

Date of Declaration:

Accumulated Profits (at market value) xx

Share dividends distributable-Preference (at par) xx
Share dividends distributable-Ordinary(at par) xx
Share Premium- Preference Share Dividends xx
 Share Premium- Ordinary Share Dividends xx

Date of Record No journal entry

Date of Distribution
Share dividends distributable-Preference (at par) xx
Share dividends distributable-Ordinary (at par) xx
Share capital-Preference xx
Share capital-Ordinary xx

b. Large share dividend

Date of Declaration:

Accumulated Profits (at par value) xx

Share dividends distributable-Preference (at par) xx
Share dividends distributable-Ordinary(at par) xx
Date of Record No journal entry

Date of Distribution
Share dividends distributable-Preference (at par) xx
Share dividends distributable-Ordinary (at par) xx
Share capital-Preference xx
Share capital-Ordinary xx

2. Scrip dividend - distribution of corporate profits in form of

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

PROFORMA ENTRY

Date of Declaration: Accumulated Profits xxx

Cash Dividends payable xxx

Date of Distribution: Cash Dividends payable xxx

CASH xxx
CASH DIVIDENDS

Preference Share is
Preference share Ordinary share
NON-CUMULATIVE Current Dividend Balance
CUMULATIVE Current Dividend + Balance
Passed Dividends
NON-PARTICIPATING Current Dividend Balance
PARTICIPATING Current Dividend + Current Dividend +
pro-rata share in the pro-rata share in the
remainder remainder
CASH DIVIDENDS

Preference Share is Preference share Ordinary share

NON-CUMULATIVE & Current Dividend Remainder
NON-PARTICIPATING
CUMULATIVE & Current Dividend + Remainder
NON-PARTICIPATING Passed Dividends
NON- CUMULATIVE Current Dividend + Current Dividend +
& PARTICIPATING pro-rata share in the pro-rata share in the
remainder remainder
CUMULATIVE & Current Dividend + Current Dividend +
PARTICIPATING Passed Dividends + pro-rata share in the
pro-rata share in the remainder
remainder