Retained Earnings

Restricted Retained earnings

• Sometimes corporations place restrictions on retained earnings to

ensure that creditors’ interests are protected. There are three types
of restrictions
1. Statutory Restrictions are imposed by a regulatory body
2. Contractual restrictions are when certain contracts limit the amount
of dividends that can be paid to a certain amount or percentage
3. Voluntary restrictions are place on retained earnings by the board
of directors to limit dividends so that retained earnings can be used
elsewhere
Accounting Changes
• There are also 3 types of accounting changes that can affect retained
earnings
1. Change in accounting policy
2. Correction of errors in prior financial statements
3. Change in estimate
Change in accounting policy

• This is when the company decides to change a current accounting

policy to a new one. A company can only change from one acceptable
accounting principle to another if the change improves the usefulness
of the information in financial statements
Correction of Errors in Prior financial statements

• In this case you would simply have to make a correcting entry in the
journal and on the financial statements at the time that it is noticed
Change in Estimate

• Many times the value of things reported on the financial statement

are based on estimates. Because there changes in estimates are not
due to mistakes they would be considered changes in accounting
estimates and not accounting errors.
Homework
• Page 807 Demonstration problem