When your company has issued shares and makes a net profit, it has two choices. One is to distribute the earnings among its shareholders as cash dividends, according to the number of shares each investor owns. Alternatively, it can retain the earnings. To close the retained earnings on an accounting journal entry, mark them down as shareholders' equity. Distribute new shares to the investors to give them control of this equity. These stock dividends take the place of the cash dividends that you deny the investors by retaining the earnings.
1. Enter the earnings you retain under "Debit" on your statement.
2. Divide the earnings you plan to retain by the current stock price. For example, if your company wants to retain $50,000, and shares currently each sell for $100, divide $50,000 by 100, giving 500. This is the number of shares that you will offer as dividends.
3. Multiply the number of stock dividends by the stock's par value, which is its face value. For example, if the shares have a par value of $75, multiply 500 by $75, giving $37,500.
4. Enter the stock dividends' worth according to their par value under credit as "common stock" on your statement.
5. Subtract the dividends' worth according to their par value from your retained earnings. With this example, subtracting $37,500 from $50,000 gives $12,500. Enter this figure on your statement under credit as "Pay-in capital in excess of par -- common stock."
- "Cornerstones of Financial Accounting"; Jay Rich et. al.; 2009
- "Schaum's Outline of Financial Management"; Jae K Shim and Joel G Siegel; 2009