Earnings per share is a financial measure that shows how profitable a company is.

It is
calculated by dividing a company's net income by the number of shares it has outstanding.
Investors often use earnings per share to evaluate how well a company is doing financially and
to compare it to other companies in the same field.
- is a financial ratio that is typically calculated and reported at the end of an accounting period. It
represents the portion of a company's net income attributable to each outstanding share of
common stock.

Here are some situations in which EPS is used:

1. Investment analysis: EPS is used by investors to assess the profitability of a company

and make informed investment decisions. By comparing the EPS of different companies
in the same industry, investors can evaluate their relative earnings performance and
determine which company may be more attractive for investment.

2. Financial reporting: Publicly traded companies are typically required to disclose their
EPS in their financial statements. This allows shareholders, potential investors, and
other stakeholders to assess the company's profitability and gauge its ability to generate
earnings on a per-share basis.

3. Performance evaluation: EPS is used to evaluate the financial performance of a

company over time. By tracking changes in EPS from period to period, analysts and
management can assess whether the company's earnings are growing or declining. It
helps in monitoring the profitability trends and the effectiveness of management's
strategies.

4. Communication with stakeholders: EPS is often used as a key metric in investor

presentations, annual reports, and other communications with stakeholders. It provides a
concise and easily understandable measure of a company's earnings performance,
making it a useful tool for conveying financial information.

*** Earnings per share is not part of stockholders' equity. Nonetheless, we are including an
introduction to the topic here because the calculation for earnings per share involves the stock
of a corporation.

To calculate earnings per share (EPS), you need the following information:

• Net Income: This is the company's total income after deducting all expenses, taxes, and
interest.

• Number of Outstanding Shares: This refers to the total number of shares issued by the
company and held by shareholders.

FORMULA:
EPS = Net Income / Number of Outstanding Shares
OR
EPS = Net income – Preferred Dividends / Number of Outstanding Shares
** By removing the preferred dividends from net income, the numerator represents the profit
available to common shareholders. Because preferred dividends represent the amount of net
income to be distributed to preferred shareholders, this portion of the income is obviously not
available for common shareholders.

Example:
Company XYZ has a net income of P1,000,000 for the year and has 500,000 outstanding
shares.

Calculate the earnings per share (EPS):

EPS = Net Income / Number of Outstanding Shares
EPS = P1,000,000 / 500,000 = P2 per share

Journal Entry
- must appear on the face of the income statement if the corporation's stock is publicly traded.
Record the net income:

Date: [End of the accounting period]

Debit: Retained Earnings [P1,000,000]

Credit: Common Stock Dividends Distributable [P1,000,000]

Debit: Common Stock Dividends Distributable [P1,000,000]

Credit: Common Stock [P1,000,000]

Debit: Retained Earnings [P1,000,000]

Credit: Common Stock Dividends Distributable [P1,000,000]

Explanation of Journal Entry

** In the first entry, you transfer the net income of P1,000,000 from the Retained Earnings
account to the Common Stock Dividends Distributable account. This represents the portion of
the net income allocated to the common stockholders.

** In the second entry, you distribute the allocated net income to the common stockholders by
transferring it from the Common Stock Dividends Distributable account to the Common Stock
account.

** In the third entry, you record the retained earnings by transferring the same amount as the
allocated net income from the Retained Earnings account to the Common Stock Dividends
Distributable account. This entry ensures that the retained earnings balance is adjusted to
reflect the distribution of the net income.

ANOTHER EXAMPLE:

Assume that Company XYZ has the following information for the accounting period:

Net Income: P500,000

Preferred Stock Dividends: P50,000
Common Shares Outstanding: 100,000

Calculation of earnings available to common stockholders:

Net Income - Preferred Stock Dividends
P500,000 - P50,000 = P450,000

Calculation of earnings per share (EPS):

Earnings Available to Common Stockholders / Common Shares Outstanding
P450,000 / 100,000 = P4.50 per share

JOURNAL ENTRY

Date: [End of the accounting period]

Debit: Retained Earnings [P450,000]

Debit: Preferred Stock Dividends [P50,000]
Credit: Common Stock Dividends Distributable [P500,000]

Explanation of the entry:

The debit to Retained Earnings represents the portion of the net income allocated to common
stockholders. In this case, the net income is P500,000, and since there are no other
adjustments mentioned, the entire amount is allocated to common stockholders.

The debit to Preferred Stock Dividends represents the dividends paid to preferred stockholders.
In this case, P50,000 is allocated and paid to the preferred stockholders.
The credit to Common Stock Dividends Distributable represents the total amount of dividends
allocated to both common and preferred stockholders. The sum of P500,000 (allocated to
common stockholders) and P50,000 (allocated to preferred stockholders) totals P550,000.

***Note that the specific account names and amounts will depend on the company's chart of
accounts and accounting policies.