RETAINED EARNINGS

Definition of Retained Earnings

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

Classification of Retained Earnings

a. Unrestricted retained earnings - free and can be declared as dividends.
b. Restricted retained earnings - a corporation may be required by law or contractual
arrangements to set aside a portion of the retained earnings for specified purposes. In
addition, the BOD may voluntarily designate a portion of retained earnings for future
expenses, contingencies or other purposes.

Illustration
Pinnacle Technologgies, Inc. bought 1,000 of its shares at 150,000. A portion of the
retained earnings is restricted for the cost of the treasury purchased.
Retained earnings 150,000
Appropriated retained earnings 150,000
To restrict retained earnings for the cost of treasury shares purchased

If the treasury stocks are subsequently reissued, the restricted balance is reversed as
follows:
Appropriated retained earnings 150,000
Retained earnings 150,000
To remove restriction on retained earnings

Statement of Retained Earnings

This statement is not required per revised IAS No. 1. A retained earnings statement is
normally divided into two major sections:
 APPROPRIATED. This section presents the beginning balance of the retained earnings
appropriated account, any additions or deductions during the period and ending
balance.
 UNAPPROPRIATED. This section shows the beginning balance of the retained
earnings unappropriated account, correction of prior period error, profit or loss for the
period, dividends, transfers to and from appropriated and unappropriated accounts and
the ending balance.

The statement concludes with the total retained earnings as of the end of the period.
Sample Statement of Retained Earnings

Dynasty BookSource Asia Corporation

Statement of Retained Earnings
For the Year Ended Dec. 31, 2019

Appropriated:
Balance, 1/1/2019, as reported:
For plant expansion P180,000
For treasury stocks, 4/8/19 100,000
Retained Earnings Appropriated, 12/31/2019 P280,000

Unappropriated:
Balance, 1/1/2019, as previously reported P1,414,500
Correction of prior period error 100,000
Balance, 1/1/2019, as restated P1,514,500
Add: Profit 480,000
Total P1,994,500
Less: Cash dividends declared P65,000
Share dividends declared 60,000
Transfer to approp. for TS 100,000 225,000
Retained Earnings Unappropriated, 12/31/2019 1,769,500

Total Retained Earnings P2,049,500