Limited Company Accounts
In this lesson, we will learn how to calculate share capital issued, dividend declared and retained earnings. We also learn how to record them in journals and ledger accounts, and how they are presented in the Statement of Financial Position.
Related Lessons:
Accounting for Share Capital
Share capital are shares that a company issued to its shareholders.
As with the capital of a sole proprietorship, share capital is also a capital account and thus a Credit account.
When a business issue additional shares, shares that are subscribed by shareholders increases the company’s capital. Therefore, we
Dr Cash at bank
Cr Share capital
To calculate the value of additional shares issued and subscribed, we multiply the total number of shares subscribed by the unit share price.
Accounting for Dividend
In a limited company, dividend are profits distributed to the companies’ shareholders.
To calculate dividend payable, we multiply total number of shares issued by the dividend rate.
When dividend is declared, the amount may or may not be paid within the same accounting period.
When dividend declared is paid within the same accounting period, we
Dr Dividend
Cr Cash at bank
When dividend declared is paid in the next accounting period, we
Dr Dividend
Cr Dividend payable
Since dividends reduce the company’s total earnings, any dividends declared during the accounting period are transferred to the Retained Earnings account at the end of the period to show this reduction.
Dr Retained Earnings
Cr Dividend
Accounting for Dividend Payable
Dividend payable is dividend owing to shareholders in the current accounting period. Therefore, it is a Current Liability to the business.
When payment is made in the following accounting period, dividend is no longer owing. Therefore, the amount is reversed from the dividend payable account.
Dr Dividend payable
Cr Cash at bank
Accounting for Retained Earnings
Retained earnings are profits not distributed to the shareholders since the beginning of the company’s operation.
The Retained Earnings Account is a Credit account and comprises of:
- Balances brought forward from previous year
- Current period profit or loss
- Dividend declared for the current period
When the business made a profit, we
Dr Income summary
Cr Retained earnings
And when the business made a loss, we
Dr Retained earnings
Cr Income summary
A credit balance in Retained Earnings means the business has accumulated profits left after paying dividends. Therefore, it is added to Share Capital in the Statement of Financial Position.
A debit balance in Retained Earnings means the business has accumulated losses after paying dividends. Therefore, it is deducted from Share Capital and shown in the Statement of Financial Position as Accumulated Loss.