General ledger HASHIBUL HASAN DEPARTMENT OF CSEDAFFODIL INTERNATIONAL UNIVERSITY DHAKA,BANGLADESH
DefinitionThe General Ledger contains all of the balance sheet DAFFODIL INTERNATIONAL UNIVERSITYaccounts of an accounting system. The balance sheet DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASANaccounts are the assets, liabilities, and fund balanceaccounts of the school district. Values in General Ledger areexpressed as debits or credits.
The ledger page is actually a T-account in a more detailed format. It has theaccount title and its corresponding account number on top. It also has twosides, namely, the debit side and the credit side. Each T-account or ledgeraccount has the following columns. Date (debit side)- the date of the debit entry is entered in this column. DAFFODIL INTERNATIONAL UNIVERSITY Explanation (debit side)- A brief explanation of the debit entry is entered in this column. DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASAN “F” or folio (debit side)- The journal page number from where the debit entry was taken is entered in this column. Debit- The amount of the debit entry is entered in this column. Date (credit side) - the date of the credit entry is entered in this column. Explanation (credit side) - A brief explanation of the credit entry is entered in this column. “F” or folio (credit side)- The journal page number from where the credit entry was taken is entered in this column. Credit - The amount of the credit entry is entered in this column
An example of a page from a ledger is as follows:-Accounts receivable Account No: 2001 Date Explanation F Debit Date Explanation F Credit DAFFODIL INTERNATIONAL UNIVERSITY 2008 2008 DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASANSept-29 Service on credit 1 50, 000.00 Sept. 30 Collection 1 20,000.00 10 Collection 1 30,000.00 50,000.00 Balance 0.0
The posting procedure Step 1- Locate the account title used by the journal entry in the general ledger. Step 2- Determine if the journal entry is a debit entry or a credit. If it is a debit entry, it should be posted on the debit side of the located ledger account. If it is credit entry, it should be posted on the credit side of the located ledger account. Step 3- Record the date of the journal entry in the date column. If the posting is to be done on a fresh page, write the year on the first line. Then write the month and day of the journal entry on the second line. For succeeding entries, only the day of the journal entry should be written. The month DAFFODIL INTERNATIONAL UNIVERSITY should be written only if it is different from the month of the last entry made. DEPARTMENT OF CSE DHAKA,BANGLADESH Step 4- Write a brief explanation of the journal entry in the explanation column. It should be on the HASHIBUL HASAN same line as that of the date. Step 5- Write the amount of the journal entry in the amount column. It should be on the same line as that of the date and explanation. Step 6- In the folio column, write the page number of the general journal page that contains the posted journal entry. It should be on the same line as that of the date, the explanation, and the amount. Step 7- In the folio column of the general journal, write the account number of the page number of the ledger account in which the journal entry was posted. The account number of the page number should be on the same line as of the journal entry. Step 8- Do not leave a blank line between entries in the general ledger.
Explain With A Example :- HASHIBUL HASAN DEPARTMENT OF CSEDAFFODIL INTERNATIONAL UNIVERSITY DHAKA,BANGLADESH
Selected transaction for tina cordero company during its first month in business are presenter below :- st. 1. Invested $10000 cash in the business Sept. 5. Purchased equipment for $12000 paying $5000 in cash and the balance on account. Sept.25. Paid $3000 cash on balance owed for equipment. Sept.30. Withdrew $500 cash for personal use. General Journal General Ledger >>Equipment Date Account Title & Ref Debit Credit Date Explanation Re Debit Credit Balance Description f Sept-1 Cash 10,000 Sept.5 J1 12,000 12,000 Tina 10,000 Cordero,capital General Ledger >>Account PayableDAFFODIL INTERNATIONAL UNIVERSITY 5 Equipment 12,000 Cash 5,000 Date Explanation Ref Debit Credit Balance DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASAN Account Payable 7,000 Sept.5 J1 7,000 7,000 25 Account Payable 3,000 25 J1 3,000 4,000 Cash 3,000 30 Drawings 500 General Ledger >>Tina Cordero,capital Cash 500 Date Explanation Ref Debit Credit Balance General Ledger>>cash Sept.1 J1 10,000 10,000 Date Explanation Ref Debit Credit Balance Sept.1 J1 10,000 10,000 General Ledge >>Tina Cordero,drawing 5 J1 5,000 5,000 25 J1 3,000 2,000 Date Explanation Ref Debit Credit Balance 30 J1 500 1,500 Sept.30 J1 500 500
TRAIL BALANCE HASHIBUL HASAN DEPARTMENT OF CSEDAFFODIL INTERNATIONAL UNIVERSITY DHAKA,BANGLADESH
Trial Balance Trial Balance Calculation A basic rule of double-entry accounting Account Debits Credits is that for every credit there must be an equal debit amount. From this Account 1 xxxx.xx concept, one can say that the sum of Account 2 xxxx.xx DAFFODIL INTERNATIONAL UNIVERSITY all debits must equal the sum of all credits in the accounting system. If Account 3 xxxx.xx DEPARTMENT OF CSE DHAKA,BANGLADESH debits do not equal credits, then an HASHIBUL HASAN . error has been made. The trial balance is a tool for detecting such . errors. . Account 4 xxxx.xx The trial balance is calculated by summing the balances of all the ledger Account 5 xxxx.xx accounts. The account balances are Account 6 xxxx.xx used because the balance summarizes the net effect of all of the . debits and credits in an account. To . calculate the trial balance, construct a . table in the following format : Total xxxx.xx xxxx.xx
Steps to Prepare the Trial Balance For each ledger account — Cash, Accounts Payable, etc. — total your credits and debits. If the credit total is larger, subtract the debit total from the credit total to DAFFODIL INTERNATIONAL UNIVERSITY get your ledger account total which goes in the credit column of the trial DEPARTMENT OF CSE DHAKA,BANGLADESH balance HASHIBUL HASAN If the debit total is larger, subtract the credit total from the debit total to get your ledger account total which goes in the debit column of the trial balance Put the ledger account total in the credit or debit column of your trial balance (as identified above). When you have debit or credit totals for each ledger account, add all of your credit totals to get a credit grand total. Add all of your debit totals to get a debit grand total. This is your trial balance.
Unbalanced Trial BalanceIf you have an unbalanced trial balance, then you have an errorsomewhere in the accounting process. Examples of problems that canunbalance a trial balance include: DAFFODIL INTERNATIONAL UNIVERSITY DEPARTMENT OF CSE DHAKA,BANGLADESH Adding the debits and credits for the trial balance incorrectly; HASHIBUL HASAN Forgetting to include a ledger account balance on the trial balance; Putting the ledger account balances in the wrong debit/credit column in the trial balance; Writing the wrong ledger account balances in the trial balance columns; Miscalculating the ledger account totals; Posting a journal entry incorrectly to the general ledger, whether using the wrong number or getting your debits/credits mixed up; Making an error in your journal entry, whether using the wrong number or forgetting part of a compound journal entry.
Balanced Trial Balance If all of your journal entries were posted properly (and error-free) in the general ledger, your debit grand total and credit grand total should balance, and you can move on in the accounting cycle. If the debit and credit grand totals do not balance, then you have an error to find somewhere in your DAFFODIL INTERNATIONAL UNIVERSITY transaction posting process (journal to general ledger to trial balance). DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASAN Its possible to have a posting error even if the debits and credits do balance, but that will get found and solved later in the accounting cycle. Examples of problems that would not show up in the trial balance include: * Putting the credit amount in the debit column and the debit amount in the credit column for a particular transaction; * Recording a transaction in an incorrect account; * Forgetting to record a journal entry as a general ledger transaction; * Neglecting to make a journal entry at all.
LIMITATIONS OF A TRIAL BALANCE A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Numerous errors may exist even though the trial balance columns agree. The trial balance may balance even when: DAFFODIL INTERNATIONAL UNIVERSITY * a transaction is not journalized, DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASAN * a correct journal entry is not posted, * a journal entry is posted twice, * incorrect accounts are used in journalizing or posting, * offsetting errors are made in recording the amount of the transaction.
CHAPTER 2 THE RECORDING PROCESSAfter studying this chapter, you should be able to:1 Explain what an account is and how it helps in the recording process2 Define debits and credits and explain how they are used to record business transactions3 Identify the basic steps in the recording process4 Explain what a journal is and how it helps in the recording process
CHAPTER 2 THE RECORDING After studying PROCESS this chapter, you should be able to:5 Explain what a ledger is and how it helps in the recording process6 Explain what posting is and how it helps in the recording process7 Prepare a trial balance and explain its purpose
THE ACCOUNT STUDY OBJECTIVE 1 An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. There are separate accounts for the items we used in transactions such as cash, salaries expense, accounts payable, etc.
BASIC FORM OF ACCOUNT STUDY OBJECTIVE 2 The simplest form an account consists of 1 the title of the account 2 a left or debit side 3 a right or credit side The alignment of these parts resembles the letter T = T account Title of Account Left or debit side Right or credit side Debit balance Credit balance
DEBITS AND CREDITS Debit indicates left and Credit indicates right Recording $s on the left side of an account is debiting the account Recording $s on the right side is crediting the account If the total of debit amounts is bigger than credits, the account has a debit balance If the total of credit amounts is bigger than debits, the account has a credit balance
DEBITING AN ACCOUNT Cash Debits Credits 15,000 Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited as the owner’s Capital is credited.
CREDITING AN ACCOUNT Cash Debits Credits 7,000 Example: Monthly rent of $7,000 is paid. Cash is credited as Rent Expense is debited.
DEBITING / CREDITING ANACCOUNT Cash Debits Credits 15,000 7,000 8,000 Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.
DOUBLE-ENTRY SYSTEMequal debits and credits made accounts for each transactiontotal debits always equal the total creditsaccounting equation always stays in balanceAssets Liabilities Equity
DEBIT AND CREDIT EFFECTS— ASSETS AND LIABILITIES Debits Credits Increase assets Decrease assets Decrease liabilities Increase liabilities
NORMAL BALANCEeveryaccount has adesignated normal balance. It is either a debit or credit.accountsrarely have anabnormal balance.
NORMAL BALANCES —ASSETS AND LIABILITIES Assets Increase Decrease Normal Liabilities Balance Decrease Debit Increase Credit Normal Balance
DEBIT AND CREDIT EFFECTS — OWNER’S CAPITAL Debits Credits Decrease owner’s capital Increase owner’s capital
NORMAL BALANCE — OWNER’S CAPITAL Owner’s Capital Decrease Increase Normal Balance Debit Credit
DEBIT AND CREDIT EFFECTS — OWNER’S DRAWING Debits Credits Increase owner’s drawing Decrease owner’s drawing Remember, Drawing is a contra-account – an account that is backwards from the account it accompanies (the Capital account).
NORMAL BALANCE — OWNER’S DRAWING Owner’s Drawing Decrease Increase Normal Balance Debit Credit
DEBIT AND CREDIT EFFECTS— REVENUES AND EXPENSES Debits Credits Decrease revenues Increase revenues Increase expenses Decrease expenses
NORMAL BALANCES —REVENUES AND EXPENSES Revenues Decrease Increase Normal Balance Expenses Increase Debit Decrease Credit Normal Balance
EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTS Asset = Liabilities + Owner’s Equity s Owner’s Owner’s Assets = Liabilities + - Capital Drawing Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. + - - + - + + - + Revenues - Expense s Dr. Cr. Dr. Cr. - + + -
Which of the following is not true of theterms debit and credit. a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right.Chapter 2
THE RECORDING PROCESS STUDY OBJECTIVE 31 analyze each transaction (+, -)2 enter transaction in a journal3 transfer journal information toledger accounts
THE JOURNAL STUDY OBJECTIVE 4 Transactions Are initially recorded in chronological order before they are transferred to the ledger accounts.A general journal has 1 spaces for dates 2 account titles and explanations 3 references 4 two amount columns
THE JOURNALA journal makes several contributions torecording process:1 discloses in one place the complete effect of a transaction2 provides a chronological record of transactions3 helps to prevent or locate errors as debit andcredit amounts for each entry can be compared
JOURNALIZING Entering transaction data in the journal is known as journalizing. Separate journal entries are made for each transaction. A complete entry consists of: 1 the date of the transaction, 2 the accounts and amounts to be debited and credited, 3 a brief explanation of transaction.
TECHNIQUE OF JOURNALIZINGThe date of the transaction is entered into the date column. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
TECHNIQUE OF JOURNALIZINGThe debit account title is entered at the extremeleft margin of the Account Titles and Explanationcolumn. The credit account title is indented onthe next line. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
TECHNIQUE OF JOURNALIZINGThe amounts for the debits are recorded in theDebit column and the amounts for the creditsare recorded in the Credit column.
TECHNIQUE OF JOURNALIZINGA brief explanation of the transaction is given.
TECHNIQUE OF JOURNALIZINGA space is left between journal entries. Theblank space separates individual journal entriesand makes the entire journal easier to read. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
TECHNIQUE OF JOURNALIZINGThe column entitled Ref. is left blank at the timejournal entry is made and is used later when thejournal entries are transferred to the ledgeraccounts.
SIMPLE AND COMPOUND JOURNAL ENTRIESIf an entry involves only two accounts, one debitand one credit, it is considered a simple entry.
COMPOUND JOURNAL ENTRY When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.123
COMPOUND JOURNAL ENTRYThis is the wrong format; all debits must be listedbefore the credits are listed.
THE LEDGER STUDY OBJECTIVE 5A Group of accounts maintained by acompany is called the ledger.A general ledger contains all theassets, liabilities, and owner’sequity accounts
POSTING A JOURNAL ENTRY STUDY OBJECTIVE 6 In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal.
POSTING A JOURNAL ENTRY In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal.
POSTING A JOURNAL ENTRYIn the reference column of the journal, write the accountnumber to which the debit amount was posted.
POSTING A JOURNAL ENTRY GENERAL LEDGER CASH NO. 10 Date Explanation Ref. Debit Credit Balance 2005Sept. 1 J1 15,000 15,000 In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and credit amount shown in the journal.
POSTING A JOURNAL ENTRYIn the reference column of the journal, write the account number to which thecredit amount was posted.
CHART OF ACCOUNTSA Chart of Accounts lists the accounts and theaccount numbers which identify their location inthe ledger.
INVESTMENT OF CASH BY OWNER October 1, C.R. Byrd invests $10,000 cash in anTransaction advertising business known as: The Pioneer Advertising Agency. Basic •The asset Cash is increased $10,000 Analysis •Owner’s equity, C. R. Byrd, Capital is increased $10,000. Debits increase assets: debit Cash $10,000.Debit-Credit Credits increase owner’s equity: credit C.R. Byrd, Analysis Capital $10,000.
PURCHASE OF OFFICE EQUIPMENTJOURNAL ENTRYPOSTING
RECEIPT OF CASH FOR FUTURE SERVICE October 2, a $1,200 cash advance is received from aTransaction client, for advertising services expected to be completed by December 31. Asset Cash is increased $1,200 Liability Unearned Fees is increased $1,200 Basic •Service has not been rendered yet. Analysis Liabilities often have the word “payable” in their title, Unearned fees are a liability. Debits increase assets: debit Cash $1,200.Debit-Credit Credits increase liabilities: credit Unearned Fees Analysis $1,200.
RECEIPT OF CASH FOR FUTURE SERVICEJOURNAL ENTRYPOSTING
PAYMENT OF MONTHLY RENT October 3, office rent for October is paid in cash,Transaction $900. Basic The expense Rent is increased $900 Analysis Payment pertains only to the current month Asset Cash is decreased $900.Debit-Credit Debits increase expenses: debit Rent Expense $900. Analysis Credits decrease assets: credit Cash $900.
PAYMENT FOR INSURANCE October 4, $600 Paid one-year insurance policy- Transaction expires next year on September 30. -Asset Prepaid Insurance increases $600 -Payment extends to more than the current month Basic -Asset Cash is decreased $600. Analysis -Payments of expenses benefiting more than one period are prepaid expenses or prepayments.Debit-Credit Debits increase assets: debit Prepaid Insurance Analysis $600. Credits decrease assets: credit Cash $600.
PURCHASE OF SUPPLIES ON CREDIT October 5, an estimated 3-month supply ofTransaction advertising materials is purchased on account from Aero Supply for $2,500. Basic The asset Advertising Supplies is increased $2,500; Analysis the liability Accounts Payable is increased $2,500. Debits increase assets: debit Advertising SuppliesDebit-Credit $2,500. Credits increase liabilities: credit Analysis Accounts Payable $2,500.
PURCHASE OF SUPPLIES ON CREDITJOURNAL ENTRYPOSTING
HIRING OF EMPLOYEES October 9, hire four employees to begin work on October 15. Each employee is to receive a weeklyTransaction salary of $500 for a 5-day work week, payable every 2 weeks -- first payment made on October 26. A business transaction has not occurred only an Basic agreement between the employer and the Analysis employees to enter into a business transaction beginning on October 15.Debit-Credit A debit-credit analysis is not needed because there is Analysis no accounting entry.
WITHDRAWAL OF CASH BY OWNER October 20, C. R. Byrd withdraws $500 cash forTransaction personal use. Basic The owner’s equity account C. R. Byrd, Drawing is Analysis increased $50 The asset Cash is decreased $500. Debits increase drawings: debit C. R. Byrd,Debit-Credit Drawing $500. Credits decrease assets: credit Analysis Cash $500.
WITHDRAWAL OF CASH BY OWNERJOURNAL ENTRYPOSTING
PAYMENT OF SALARIES October 26, employee salaries of $4,000 are owedTransaction and paid in cash. (See October 9 transaction.) Basic The expense account Salaries Expense is increased Analysis $4,000; the asset Cash is decreased $4,000.Debit-Credit Debits increase expenses: debit Salaries Expense Analysis $4,000. Credits decrease assets: credit Cash $4,000.
RECEIPT OF CASH FOR FEES EARNED October 31, received $10,000 in cash from Copa Transaction Company for advertising services rendered in October. Basic The asset Cash is increased $10,000; the revenue Analysis Fees Earned is increased $10,000. Debit-Credit Debits increase assets: debit Cash $10,000. Credits Analysis increase revenues: credit Fees Earned $10,000.
RECEIPT OF CASH FOR FEES EARNED JOURNAL ENTRY POSTING
THE TRIAL BALANCESTUDY OBJECTIVE 7 The trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove debits = credits after posting. If debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting.
THE TRIAL BALANCEThe Steps in preparing the Trial Balance are: 1. List the account titles and balances 2. Total the debit and credit columns 3. Prove the equality of the two columns
A TRIAL BALANCE The total debits must equal the total credits.
LIMITATIONS OF A TRIAL BALANCEA trial balance does not prove all transactions have been recorded or the ledger is correct. Numerouserrors may exist even though the trial balance columns agree. For example, the trial balance may balance even when: a transaction is not journalized a correct journal entry is not posted a journal entry is posted twice incorrect accounts used in journalizing or posting offsetting errors are made in recording
Which one of the following represents the expandedbasic accounting equation? a. Assets = Liabilities + Owner’s Capital + Owner’s Drawings – Revenue - Expenses. b. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenue. c. Assets – Liabilities – Owner’s Drawings = Owner’s Capital + Revenue – Expenses. d. Assets = Revenue + Expenses – Liabilities.Chapter 2
Stockholders’ Equity Fundamentals of Corporate Finance by Robert Parrino and David S. KidwellJohn Wiley & Sons, Inc.. (c) 2009. Copying Prohibited
Fundamentals of Corporate Financeby Robert Parrino and David S. KidwellJohn Wiley & Sons, Inc.. (c) 2010. CopyingProhibited.Reprinted for Sai Chakrala, Bank ofAmericaReprinted with permission as asubscription benefit of Books24x7,
Learning Objectives• Explain the advantages and disadvantages of a corporation• Measure the effect of issuing stock on a company’s financial position• Describe how treasury stock transactions affect a company• Account for dividends and measure their impact on a company• Use different stock values in decision making• Evaluate a company’s return on assets and return on common equity
Characteristics of Corporate Form• Separate legal entity• Continuous life and transferability of ownership• Limited liability for stockholders• Separation of ownership and management• Corporate taxation – income is taxed at the corporate level; dividends are taxed at the shareholder level• Government regulation
Organizing a Corporation• Obtain a charter from the state• Bylaws• Stockholders elect Board of Directors• Board of Directors sets policy and appoints officers• Board elects a chairperson• Board selects the president
Stockholders’ Rights• Vote – one vote for each share of stock• Dividends –right to participate in dividend distributions• Liquidation – right to receive proportionate share of assets remaining after creditors have been paid• Preemption – right to maintain one’s proportionate share of ownership in the corporation
Stockholders’ Equity• Paid-in capital (contributed capital)• Retained earnings• Classes of stock – Common and Preferred – Par or No-Par
Issuing StockIssue 6.2 million shares of $10 par value stock at par. Cash 62,000,000 Common Stock 62,000,000 To issue common stockIssue 6.2 million shares of $0.01 par value stock at $10 pershare. Cash 62,000,000 Common Stock 62,000 Paid-in Capital in Excess of Par – Common (6,200,000 x 9.99) 61,938,000 To issue common stock
Issuing StockIssue 3,000 shares of no-par stock for $20 per share. Cash 60,000 Common Stock 60,000 To issue common stockIssued 3,000 shares of no-par stock with a stated value of $1for $20 per share Cash 60,000 Common Stock (3,000 x $1 stated value) 3,000 Paid-in Capital in Excess of Stated Value – Common (3,000 x 19) 57,000 To issue common stock
Common Stock Issued for Other Assets• Value the exchange at the current market value of the assets received.Issued 15,000 shares of $1 par common for equipment worth$4,000 and a building worth $120,000. Equipment 4,000 Building 120,000 Common Stock (15,000 x $1 par) 15,000 Paid-in Capital in Excess of Par – Common (124,000 – 15,000) 109,000 To issue common stock
Ethical Issues• When shares are issued for assets other than cash, care should be taken to not over-value those assets and thus inflate values on the balance sheet.
Treasury Stock• A company’s own stock that it has issued and later reacquired is treasury stock.• Reasons companies have treasury stock – to use for employee stock purchase plans – to increase net assets by buying shares at a low price and selling at a higher price – to avoid takeover by outside parties• Treasury Stock is a contra stockholders’ equity account
Preferred Stock• Entries are similar to entries for common stock.• Paid-in Capital in Excess of Par – Preferred is a separate equity account.
Treasury StockPurchased shares of treasury stock for $19,000. Treasury Stock 19,000 Cash 19,000 To purchase treasury stockSold treasury stock for $25,000 that was previouslypurchased for $19,000. Cash 25,000 Treasury Stock 19,000 Paid-in Capital in from Treasury Stock 6,000 Sold treasury stock
Other Stock-Related Issues• If treasury stock is sold below its cost, retained earnings is debited for the difference between cost and selling price.• Stock retirement involves purchasing stock and removing it from “issued” status.• To retire stock, remove the stock account, any related paid-in capital accounts, and increase cash.
Dividends• To pay dividends, a company must have – enough retained earnings to declare the dividend – enough cash to pay the dividend• Relevant dates related to dividends – Declaration date – Date of record – Payment date
DividendsDeclaration date – a liability is created. Retained Earnings 50,000 Dividends Payable 50,000 Declared a cash dividendDate of record – no entry requiredDate of payment – a liability is settled Dividends Payable 50,000 Cash 50,000 Paid cash dividend
Computing Dividends• Dividends on preferred stock are either – percentage rate – dollar amount• Preferred stock may be – cumulative (dividends in arrears must be paid before other stockholders receive a dividend) – non-cumulative – dividends not paid in one year are not made up later.
Stock Dividend• A proportional distribution by a corporation of its own stock to the stockholders• Increase stock account and decrease retained earnings.• Total equity is unchanged, and assets and liabilities are unaffected.• Reasons for stock dividends: – to conserve cash – to reduce the per-share market price of the stock
Stock Dividend• Small stock dividend (less that 25%) reduces retained earnings for the current market value of the stock• Large stock dividend (greater than 25%) reduces retained earnings for par value of the stock.
Stock Dividend10% stock dividend declared when 20,000,000 shares ofcommon stock are outstanding. Market price of the stock is$15. 20,000,000 shares of common outstanding x .10 stock dividend x $15 market value per share of common Retained Earnings 30,000,000 Common Stock 20,000 Paid-in Capital in Excess of Par – Common 29,980,000 Distributed a 10% stock dividend 20,000,000 x 0.10 x $.01 par value per share
Stock Split• An increase in the number of authorized, issued, and outstanding shares of stock, coupled with a proportionate reduction in the stock’s par value.• Total equity does not change. Only par value, number of shares issued, and number of shares authorized are affected.