CORPORATION ACCOUNTING

Retained Earnings/Accumulated Profts

(Losses)
The accumulated profts account holds the accumulation of the net
earnings or losses of a corporation. It represents capital of the
corporation arising from its operations. It is the account that is used to
close the Income Summary account of a corporation.
Accumulated Profts
Debit Credit
Net loss Net income
Appropriations for treasury shares,
contingencies, plant expansion, etc.
Reversal of appropriations
Declaration of dividends
osses from sale of treasury shares
The accumulated profts account has a normal credit !alance. A de!it
!alance in the retained earnings account is called a defcit or
accumulated losses..
Appropriation of Accumulated Profts (Retained
Earnings)
1. The entire amount of accumulated profts may !e presumed to
!e unrestricted as to dividend declaration unless restrictions are
indicated in the fnancial statements.
2. Te intention o! a""ro"riation is to limit te a#aila$le
amount o! accumulated profts a#aila$le !or di#idend
declaration% A""ro"riation does not mean tat !unds are
set aside !or a s"ecifc "ur"ose%
3. Appropriations of retained earnings may !e !ased on the
follo"ing#
egal re$uirement
%ontractual re$uirement
1
&oluntary or discretionary on the part of management
4. A portion of retained earnings may !e
appropriated'reserved'earmar(ed for a specifc purpose.
)xamples are
"hen a company reac$uires its o"n shares *treasury
shares+,
"hen a corporation has a pending la"suit and there is a
possi!ility of losing a case,
"hen there is a plan for plant expansion.
5. -hen the cause for restriction no longer exists, the appropriation
is not necessary anymore. A reversing entry is prepared restoring
the amount of appropriation !ac( to the unrestricted !alance.
Pro-forma Entries
Net income Income summary xxx
Accumulated .rofts xxx
Net loss Accumulated .rofts xxx
Income summary xxx
Appropriation Accumulated .rofts xxx
Appropriated for //////// xxx
Reversal of Appropriated for /////// xxx
appropriation Accumulated .rofts xxx
Classroom Exercises
1. Assume the follo"ing
01x2 .31,111 net income
01x4 4,111 net loss
01x5 01,111 net income
01x6 37,111 dividends declared
01x7 04,111 net income
Assume that there is no other transaction "hich a8ected
accumulated profts. %ompute the !alance of the accumulated
profts account as of Decem!er 93, 0133.
2. Assume the follo"ing
2
01x4 .31,111 net income
01x5 7,111 net loss
01x6 4,111 net loss
01x7 5,111 net loss
Assume that there is no other transaction "hich a8ected
accumulated profts. %ompute the !alance of the accumulated
profts account as of Decem!er 93, 0133.
:uly 0139
3