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RETAINED EARNINGS

 Represents the accumulated profits and losses

 Can be distributed as dividends to the shareholders in the lifetime of the firm

The shareholder’s equity shows 2 rights over the corporate assets, these are:

 Right over contributed capital or shareholders’ investments

 Right over earned capital or retained earnings

The Trust Fund Doctrine – provided to protect the corporations creditors.

In T -account form , postings to Retained Earnings will show the following:

Debits

- Net loss for the period

- Dividends
- Appropriations

Credits

- Net income for the period

- Reversal of appropriations

If the Retained Earnings shows a credit balance = Revenues > Expenses

=business is profitable

If the Retained Earnings shows a debit balance (deficit) = Revenues < Expenses every year
= business is incurring losses over the years
A deficit is shown as a deduction from the total contributed capital

If the result of operation is a net income , the closing entry will be:

DATE PARTICULARS DR CR

INCOME SUMMARY XXXX

RETAINED EARNINGS XXXX

If the result of operation is a net loss, the closing entry will be:

DATE PARTICULARS DR CR

RETAINED EARNINGS XXXX

INCOME SUMMARY XXXX
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Dividends

- Distribution of profits as decided upon by the Board of Directors

- Reduce the Retained Earnings

2 Kinds of Dividends:

 Ordinary dividends – dividends out of earnings

-distributed periodically based on the accumulated earnings or retained earnings

 Liquidating dividends – dividends out of capital

-distribution of assets or return of shareholders’ investments upon termination
The corporation

Restrictions on the declaration of dividends

 Declaration of dividends shall be based on the surplus profits arising from the business (Sec 43 of the
Corporation Code)
Surplus profits pertain to unrestricted or unappropriated earnings of the corporation.
 Stock Corporations are prohibited from retaining surplus profits in excess of 100% of their paid -up capital
except when justified by circumstances ( ex. Plant expansion, Treasury shares) ).
An appropriation should be set-up restricting the Retained Earnings amount.

Entitlement to dividends (Sec. 137 of the Corporation Code of the Philippines)

 Shares of stocks issued

 Subscribed shares which are not delinquent (cash dividends are applied to their unpaid balance)
Subscribed shares which are delinquent (cash dividends are applied to their unpaid balance including
incidental costs and expenses)
 Except treasury shares

Three (3 ) Significant dates in the declaration of dividends:

 Date of declaration
o date when dividends are formally declared by the Board.
o A liability to distribute dividends should be recognized in the corporate books as follows
DATE PARTICULARS DR CR
2018
Nov.30 RETAINED EARNINGS XXXX
DIVIDENDS PAYABLE XXXX

Dividends declared during the year may be debited to a temporary title called “ Dividends” instead of
Retained Earnings, but should be closed to Retained Earnings at the end of the year.

 Date of Record
o The corporation determines the shareholders wo will be entitled to the dividends (based on the
Stock and Transfer Book)
o No journal entry is required.
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 Date of Distribution
o Date the dividends are actually distributed to the shareholders.
o To record the distribution, the following entry ids prepared:
Date Particulars DR CR
2019
Jan. 15 Dividends Payable XXXX
Cash/ Property/ Share Capital XXXX

The Three (3) most common types of Dividends:

1. Cash Dividends
o Use of the term Dividend without qualification
o Expressed at a certain amount of peso per share ex. P 5 / share
o Expressed as a certain percentage of the par value of preference shares
ex. 18% of the P100 par value = P 18/share
o Must be declared when there is sufficient unrestricted profits and sufficient cash
o Account title used “ Cash Dividends payable”
o Decrease the assets of the corp.

2. Property Dividends
o Can be declared if there is no available cash
o Can be in the form of merchandise or shares of stocks of other corporations
o Account title used “ Property Dividends payable”
o Decreases the assets of the corp.

3. Liability dividends
o Deferred cash dividends payable in some future time because of the unavailability of cash at the
time of the dividend declaration
o In the form of a “scrip” or a written promise to pay at a certain future date is given to the
shareholder
o Additional interest is paid by the corporation for the waiting period from the date of declaration to
the date of payment
o Account title used “ Scrip Dividends payable”

4. Stock Dividends
o Distribution of the corporations own stock coming from the “ unissued shares”
o Does not decrease the assets of the corp., shareholders equity remains the same
o capitalization of the retained earnings, or a transfer of the earned capital to contributed capital
o may also come from the Share premium expressed as a certain percentage of the share issued or
subscribed.
o Increases the no. of shares of the shareholders, but does not increase the interest or right of the
stockholder over the corporations.

Dividends Paid to Preference and Ordinary Shareholders

 Preference shares- Enjoy a preferential treatment when dividends are declared

-has a fixed dividend rate ex. 10% preference shares Par value P 100

o Cumulative – qualified to receive dividends for current and prior years once they are declared
o Participating- aside from the dividends computed based on the dividends rate, they will also receive a
pro-rata distribution on the remaining dividends together with the ordinary share holders.
o Non-cumulative- will receive only dividends declared for the current year
o Non-participating-entitle only to the extent of the preference dividend rate.
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Kinds of Preference shares:

DIVIDENDS NON-
DECLARED CUMULATIVE, NON- CUMULATIVE, CUMULATIVE,
NON- CUMULATIVE, NON- PARTICIPATING
PARTICIPATING PARTICIPATING PARTICIPATING

CURRENT YEAR YES YES YES YES

NO NO YES YES
PRIOR YEARS
EXCESS OF CURRENT NO YES NO YES
YEARS DIVIDENDS
EXCESS OF PRIOR NO NO NO YES
YEARS DIVIDENDS

 Ordinary shares -receive dividends on what is left after paying the preference share

LIQUIDATING DIVIDENDS

 Applicable when the corporation is in its liquidating or terminating stage.

 Permitted during the life of a wasting assets corporation, such as mining corporation
 Journal entry is Debit is to Share Capital and Share premium and Credit is to Cash

EARNINGS PER SHARE

 Amount of income earned for each share held by the shareholders.

 Relevant in evaluating business performance and estimating the earnings potential of a corporation.
 Determines the attractiveness of the common stock and in deciding the stock’s market value.
 Formula:

 (I kind of share) : Net income / Outstanding ordinary shares

 (2 kinds of shares) : (Net Income – Preference Dividends)
Average Outstanding Ordinary Shares

Market value
- price at which a share of stock is bought or sold in the open market or the stock exchange.
- influenced by factors such as the rate of return on equity, and the political and economic situation of the
business.
- Frequently traded shares are reported in the newspaper and also traded on line.
- Prices are shown as:
 Open – starting price of the day
 Close-ending price of the day
 High – peak price of the shares
 Low – lowest price of the shares
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Other Ways to assess the attractiveness of the Shares of stock:

1. Price -Earning Ratio : Market Value / Earning Per share

2. Return on equity : Net income / Ordinary Shareholders Equity

Book Value per Share

- Represents the equity or right of a shareholder (expressed in peso share) in the net assets of the
corporation.
- Represents the amount of assets to be paid on each share held by the shareholder.
- Formula: Net Assets or Shareholders equity
No. of shares Outstanding

Appropriation of Retained Earnings:

- Unless there is a restriction , the whole amount of the Retained Earnings may be appropriated for dividends.

Kinds of Appropriations:

1) Appropriation for Treasury shares

– plan of the Corp. to reacquire its own shares.
-classified as a legal appropriation

2) Appropriation for contingencies

– reserved for pending lawsuit , wherein there is a probability that the Corp. will lose .
-classified as a voluntary appropriation

3) Appropriation for plant Expansion

– plan to acquire land, plant facilities
-classified as a voluntary appropriation

4) Appropriation for bonds and stock Redemption

-set aside to ensure the eventual payment of the bonds or redemption of the stocks
-classified as a contractual appropriation

Presentation of the Statement of Retained Earnings

 Has 2 sections
-Unappropriated Retained Earnings
-Appropriated Retained Earnings
 PAS 1 does not require the preparation of this statement, what is required is the Statement of Changes
in Shareholders’ Equity.
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