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hey
i want to know that wether company can purchase an asset through retained earnings if so what will be the accounting entry@farooq
hi, what do you mean “through retained earnings”?
Retained earnings can be treated as liability due to shareholders, it isn’t cash.
It is usually cash in bank (or in hand) when you purchase an asset, and entries will be: Dr Asset; Cr Cash@sangria and tutor
ok fair enough
so tell me are they not profits that are kept by company instead of giving dividends for business purpose. company can issue bonus shares through t and can use it for expension . so if it buys some machinary or building regarding expansion that would be an asset . in this case what will be entry ?Retained earnings – it is profit that is generated for periods. It is assumed that cash also increases when earning profits – these events are connected, but increase in profits doesn’t mean directly increase in cash. And orthewise.
I would recommend to distinguish events.
If company wants to pay out dividend, then accrue dividends: Dr Retained earnings, Cr dividends
When dividends are actually paid: Dr dividends, Cr cashSay, bonus issue of shares are at cost of retained earnings: Dr Retained earnings; Cr ordinary equity.
No movements in cash.Last transaction will also mean, that company doesn’t have liability due to shareholders (as bonus issue is at cost of retained earnings), but if the same time company has cash available (see the first paragraph), it can invest (purchase of assets, machinary, etc).
If I haven’t understand you, try to repraze 🙂
Earnings can be retained “to finance expansion” It’s a misleading statement and you have been duly misled! Retained Earnings are an integral element of Shareholders’ Funds.
Basic FUNDAMENTAL accounting equation is “Shareholders’ Funds = Net Assets”
Now, when shareholders’ funds is increased because the company has made a profit this year and not paid it out by way of dividend, at the same time (correspondingly) the company’s net assets must also have increased.
So, by holding back retained earnings and NOT paying a dividend, a company is correspondingly building up its assets. And it’s those assets that will be used to PAY for any expansion, new buildings, new assets, new machinery
Ok?
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