RETAINED EARNINGSClosing the books:1.Close all nominal accounts with debit and credit balances to income summary.2.Close income summary to:If
:Income SummaryxxRetained Earningsxx If Net LossRetained EarningsxxIncome SummaryxxRETAINED 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.
Unappropriated or Free Retained Earnings is available for dividend distribution.
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, sufficientretained 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 themanagement)
Appropriations may be for:
Sinking FundJournal Entry for appropriation of Retained Earnings:
Retained EarningsxxAppropriated for Treasury Stockxx
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 Stockxx