CORPORATION ACCOUNTING

Retained Earnings/Accumulated Profits

(Losses)
The accumulated profits account holds the accumulation of the net
earnings or losses of a corporation. It represents capital of the
corporation arising from its operations. It is the account that is used to
close the Income Summary account of a corporation.
Accumulated Profits
Debit
Net loss

Credit
Net income

Appropriations for treasury shares, Reversal of appropriations

contingencies, plant expansion, etc.
Declaration of dividends
Losses from sale of treasury shares

The accumulated profits account has a normal credit balance. A debit

balance in the retained earnings account is called a deficit or
accumulated losses..

Appropriation of Accumulated Profits (Retained

Earnings)
1. The entire amount of accumulated profits may be presumed to
be unrestricted as to dividend declaration unless restrictions are
indicated in the financial statements.
2. The intention of appropriation is to limit the available
amount of accumulated profits available for dividend
declaration. Appropriation does not mean that funds are
set aside for a specific purpose.
3. Appropriations of retained earnings may be based on the
following:
Legal requirement
Contractual requirement

 Voluntary or discretionary on the part of management

4. A portion of retained earnings may be
appropriated/reserved/earmarked for a specific purpose.
Examples are
when a company reacquires its own shares (treasury
shares);
when a corporation has a pending lawsuit and there is a
possibility of losing a case;
when there is a plan for plant expansion.
5. When the cause for restriction no longer exists, the appropriation
is not necessary anymore. A reversing entry is prepared restoring
the amount of appropriation back to the unrestricted balance.

Pro-forma Entries
Net income
Net loss
Appropriation
Reversal of
appropriation

Income summary
Accumulated Profits

xxx

Accumulated Profits
Income summary

xxx

Accumulated Profits
Appropriated for ________

xxx

Appropriated for _______

Accumulated Profits

xxx

xxx
xxx
xxx
xxx

Classroom Exercises
1. Assume the following
20x4
P10,000 net income
20x5
5,000 net loss
20x6
20,000 net income
20x7
18,000 dividends declared
20x8
25,000 net income
Assume that there is no other transaction which affected
accumulated profits. Compute the balance of the accumulated
profits account as of December 31, 2011.
2. Assume the following

20x5
P10,000 net income
20x6
8,000 net loss
20x7
5,000 net loss
20x8
6,000 net loss
Assume that there is no other transaction which affected
accumulated profits. Compute the balance of the accumulated
profits account as of December 31, 2011.
July 2013