Question: Accounting QuestionDefinition of Retained Earnings?
So if I own stock in a company, and the company gives out common stock dividend payments, do they send me a check? Do they give me an option to reinvest and buy stock at the par value? market value? If I did reinvest that money, would it be called Retained Earnings?
( I am in Accounting I in college and I am trying to understand Corporate Stock Accounting )
Thanks again.
Answer:
Earnings that are not paid out in dividends are added to retained earnings on the balance sheet.
What you as a shareholder do with the dividends has nothing to do with RE.
It depends on the company but it is usually bought on the open market at market value.
Par value is a totally meaningless number. A hundred years ago it meant something if the company went bankrupt. The only reason you see it today is that some states have out of date laws that still require a company chartered in their state to assign a par value to the stock.
Retained Earnings is the net income earned by a corporation that is retained in the business, i.e. not distributed in a dividend. Dividends can be done in several ways. Cash dividends are simply that, and the shareholder would receive a check for their portion of the dividend. There are also stock dividends, in which the shareholder may receive additional shares of company stock as the dividend. This would not be considered Retained Earnings, but rather the amount of the dividend would increase the Common Stock account, and reduce the amount that goes into Retained Earnings. Here are a few examples:
Net Income for 2011: $10 million
Dividend Declared: $2 million
With the initial closing of the ledger, Retained Earnings would be increased by the $10 million in net income.
Debit Income Summary $10 million
Credit Retained Earnings $10 million
If a cash dividend is declared, the company would post a liability for dividend payable, and reduce Retained Earnings for the amount.
Debit Retained Earnings $2 million
Credit Dividends Payable $2 million
When the dividend is paid, the liability would be cleared with the cash payout.
Debit Dividends Payable $2 million
Credit Cash $2 million
Now if a stock dividend is declared, the amount of the divided would be moved from Retained Earnings to the stock account on balance sheet.
Debit Retained Earnings $2 million
Credit Common Stock $2 million