MUHASEBE II

Retained Earnings that represents the amount earned through profitable operations of a corporation and that is kept in the corporation. In other words, it is the earned amount which is not distributed to the shareholders as dividends as it is briefly mentioned before. On the other hand, the distributions from the earnings to the shareholders is named as dividends.

If there is a debit balance in Retained Earnings, this is called a deficit (debit balance) in Retained Earnings.

A dividend is a distribution of some portion of earnings to the shareholders by a corporation.

After the decision of paying dividends, three dates are important for a corporation. These are Declaration date, the Record date, and Payment date.

If a corporation has already issued both common and preferred shares, the shareholders who have preferred shares should receive dividends at first. After the preferred shareholders receive cash dividends, the common shareholders may receive cash if there is still any remaining amount from the total amount of dividends. Because preferred shares have some priorities over the common shares.

Usually, the dividend rate on preferred shares is expressed as a percentage of preferred share par value (such as 5%) on the certificate. The preferred dividend is calculated as follow:

The preferred dividend = Outstanding preferred shares x Par value x Preferred dividend rate
Assume that (A) Inc. has 40,000 outstanding preferred shares of 8%, 20 TL par preferred share. In this

case, the preferred dividend is calculated as follows: 40,000 x 20 x 8% = 64,000 TL

Preferred share cannot guarantee that a corporation will pay a dividend equal to the preferred amount and sometimes a corporation may fail to pay any dividends. If a corporation cannot pay any dividends, the preferred share is called dividend in arrears. But, generally preferred shares are issued as cumulative preferred shares and preferred shareholders can receive all the dividends in arrears before the common shareholders receive any dividend in the next period.

The second popular way to distributing dividends to the shareholders is to share dividends. In this case, the distributed item is different than cash dividends. Share dividend is a distribution of a corporation’s own shares to the shareholders as dividends. It must be an effective alternative to conserve cash while continuing to distribute a dividend to the shareholders and reward them. Besides distributions of share, dividends may provide some advantages by reducing the market price of shares. Thanks to low market price, a corporation’s shares may be seen more attractive by the investors.  For whatever reason it might be, it is important to understand the effects and differences of share dividends.

Small share dividends: These are the dividends which are less than 20%–25% of the corporation’s issued shares. To record small share dividends fair market value should be used. This practice is based on the assumption that a small share dividend will have little effect on the market price of the shares previously outstanding.

Usually, the reason for share splits is to decrease the market price and make the shares more appropriate and attractive for the investors. But share splits have no financial effect on any account balance. Thus no classical journal entry is required. It should be recorded in a memorandum entry that represents a note without any balance.

One of the ratios that is used for analysis is the Return on Equity (ROE). It measures a corporation’s profitability by presenting how much profit it generates with each item (TL) of shareholders’ equity. It can be calculated as follows: Return on Equity (ROE)=Net income/ Return on Equity (ROE)