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