Income tax expense occurs in a corporation. Net income in a corporation means income after tax.
Statement of Retained Earnings:
Statement of Retained Earnings replaces Statement of Changes in Owner’s Equity from a proprietorship.
Measures changes resulting from Net Income (increases to Retained Earnings) and Dividends (decreases to Retained Earnings).
Information about shareholders’ investments not included
Shareholders’ equity in a corporation is divided into Share Capital (shareholder’s investments) and Retained Earnings (from Statement of Retained Earnings). Total shareholders’ equity is the sum of these two categories.
Directors declare a $1 dividend on 5,000 outstanding common shares.
When the dividend is paid, the following journal entry is required:
At the end of the period another entry is required:
Cash Dividends Declared 5,000 Dividend Payable 5,000 To record dividend declared on common shares. Dividend Payable 5,000 Cash 5,000 To record payment of dividend. Retained Earnings 5,000 Cash Dividends Declared 5,000 To record payment of dividend.
Participating preferred shares may entitle the preferred shareholders to additional dividends in excess of their stated amount.
If the preferred shares are $9 fully participating, and the common shareholders receive a $12 dividend on their shares, the preferred shareholders are entitled to an additional $3 bringing the dividend for both classes of shares to $12.