Retained Earnings Mrs. Paz Castro

Retained Earnings
Mrs. Paz Castro

Overview

• A 2-for-2 share split gives shareholders one additional share of ordinary shares for each share they own.
• Share dividends also give shareholders additional shares based on the value of their holdings, but have a different effect on the shareholders’ equity section of the statement of financial position.
• A cash dividend is a distribution of cash based on the number of shares owned.

Retained earnings represent the component of the shareholders’ equity arising from the retention of assets generated from the profit-directed activities of the corporation.

□

Retained earnings represent the component of the shareholders’ equity arising from the retention of assets generated from the profit-directed activities of the corporation.

□
At the end of the accounting period, the Income Summary account of a corporation is closed to the Retained Earnings account.
The Retained Earnings account is credited with the corporation’s profit or debited with the loss.
□

Distributions to shareholders of cash, property or stocks from unrestricted retained earnings on the basis of all issued and fully paid shares, and all subscribed par value shares except treasury shares are called dividends. Dividend declarations reduce retained earnings.

□
□
□
Other less common situations that cause increases and decreases in retained earnings: debits resulting from reissuance of treasury stocks below cost and loss on retirement of treasury stocks and debits or credits for prior period errors.

• Prior period errors are errors discovered in

the current period that are of such significance
that the financial statements of one or more
prior periods can no longer be considered to
have been reliable at the date of their issue.
Credit entries increase the retained earnings balance and debits decrease it.

• A debit balance in the Retained Earnings

account resulting from accumulated losses is called a deficit.

• Retained earnings may be restricted or appropriated, and unrestricted or unappropriated.
• Unrestricted retained earnings are free and can be declares as dividends.
• Retained earnings restrictions may be legal, contractual or voluntary.