Accounting Fundamentals II: Lesson 7 Page 1 of 6

Accounting Fundamentals II: Lesson 7 (printer-friendly version)

Your Instructor: Charlene Messier

INSTRUCTIONS:

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Chapter 1

Introduction

In this lesson, we'll look closely at how a corporation calculates its dividends and how those dividends
are distributed to the corporation's stockholders. You will post the amounts from the special amount
columns in your journals and balance the General Ledger accounts.

We'll begin the process of preparing a worksheet for Teammates, Inc. This end-of-fiscal-period report
will include many adjustments to bring the General Ledger accounts up to date for the beginning of the
next fiscal period. Because the worksheet is a long and rather complicated report, we will begin its
preparation in this lesson and complete it in Lesson 8.

Because the owners of a corporation are its stockholders, these owners expect a share of the profit
made by the corporation. This is how stockholders make money on their investment in the business.

Just like any other business, if a corporation is unable to pay dividends to its stockholders, the
business must very carefully examine the components of the business in order to determine why it is
not being profitable. The price of stock in an unsuccessful business often decreases, making it difficult
to make a profit on the sale of shares. Likewise, a corporation that is able to pay its stockholders
significant dividends shows that the business is flourishing, and the price of the shares of stock usually
increases.

This worksheet is perhaps the most important financial report of any business. It summarizes, in an
easy-to-understand format, how the business has done over the fiscal period. All revenue and
expenses are shown, as well as all assets and liabilities. The bottom line, however, is whether the
business has made a profit.

You will learn all of these concepts and how to determine the success or failure of Teammates, Inc. for
the year ended December 31 in this and the following lesson.

You'll need to print out a copy of the two-page worksheet by clicking Lesson 7 Form in the
Supplementary Material. Because the worksheet form can be a bit confusing, we've created an
example from a different company called Handy's Hardware. You can view and print it by clicking
Handy's Hardware Example in the Supplementary Material. The Handy's worksheet has different
amounts in it, so it won't help you with your math, but you might want to print out a copy to help you
see where to enter all of the different account names and balances. We'll use this example again in
Lesson 8, so please keep it nearby!

Chapter 2

Declaring and Paying Dividends

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In a personally owned business, the owner(s) receives a share of the net income of the business.
Thus, the owner pays income tax on this amount, along with any other income received during the
year. In a corporation, the corporation pays federal income tax on the net income of the business.

As we learned in a previous lesson, a corporation's ownership is divided into units called shares of
stock. A stockholder is the owner of one or more shares of stock. Therefore, each stockholder is a
partial owner of the corporation. The Capital Stock account in the General Ledger shows the
investment in the corporation by all stockholders. When shares of stock in the business are originally
sold, the money is put into the Capital Stock account.

Money actually earned from the operation of the corporation is put

into a separate General Ledger account titled Retained Earnings.
All money earned is placed in this account before dividends are
declared and sent out to the stockholders.

Earnings that are distributed to the stockholders are called

dividends. Each time money is sent out to the stockholders in the
form of dividends, the amount is entered into a General Ledger
account called Dividends. The balance in the Dividends accounts
decreases the balance in the Retained Earnings account. For example, if a corporation made a net
income of $500,000.00, that would be the balance in the Retained Earnings account. When the
business pays its stockholders their dividends of $400,000.00, that decreases the balance in the
Retained Earnings account, thereby leaving Retained Earnings with a balance of $100,000.00.

Sometimes, not all income earned is paid out as dividends to stockholders. Sometimes the corporation
may keep some of the earnings for business expansion. Each corporation has a board of directors
whose members are elected by the stockholders. It is the board's job to manage the corporation.
Dividends can be declared and paid to stockholders only by formal action by the corporation's board of
directors.

Declaring a Dividend

Declaring a dividend means that the corporation's board of

directors has voted to pay the stockholders a certain amount on
each share of stock that they own. Dividends are usually declared
at one time and are actually paid to the stockholders at a later
date. Once the board of directors has declared a dividend, it must
be paid and is considered a liability to the corporation.

The board of directors of Teammates, Inc. has declared a dividend

of $2.00 per share for the quarter ending December 31. The
business has 5,000 stockholders, so the total dividends to be paid
will be $10,000.00. This dividend is for the fourth quarter of the
year only, not the entire year. Let's journalize this transaction:

Transaction #64: Dec. 31, Teammates board of directors

declared a quarterly dividend of $2.00 per share on 5,000
capital stock shares, total dividend, $10,000.00. Date of
payment is Jan. 15, Memorandum #14.

Using General Journal page 12, enter the date in the Date column,
and M14 in the Doc. No. column. In the Account Title column, write
Dividends and enter $10,000.00 in the Debit column. On the next line, write Dividends Payable in the
Account Title column, and enter $10,000.00 in the Credit column. Now post this transaction to the
General Ledger.

Let's suppose that it is now time to actually pay out the dividends to the stockholders. Once again, I am

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going to use December 31 as the date even though these dividends wouldn't be paid until the following
month. This will enable us to keep our records in the same period. In reality, however, these dividends
would not be paid until January 15 of the next year, and the transaction would appear in the new year's
records.

Transaction #65: Dec. 31, Paid cash for quarterly dividend declared Dec. 15,
$10,000.00, Check #18.

To journalize this transaction, enter the date on the next available line in the Cash Payments Journal.
Put C18 in the Ck. No. column. In the Account Title column, write Dividends Payable and enter
$10,000.00 in the General Debit column. On that same line, enter $10,000.00 in the Cash Credit
column. Post the debit part of this transaction to the General Ledger. The credit to the Cash account
will be posted at the end of the month as part of that column's total.

Chapter 3

Posting Special Amount Columns to the General Ledger

Now that all of the transactions for the month of December have been journalized, you must post the
totals from the special amount columns of each journal to the General Ledger.

There are five journals that we've been working with throughout this course. There is a certain order
that you should post from the special amount columns of these journals to the General Ledger
accounts. That order is:

1. Sales Journal

2. Purchases Journal

3. General Journal

4. Cash Receipts Journal

5. Cash Payments Journal

Because we've been posting our transactions from the

General Journal as we've completed them, all of those
amounts have already been posted to the General Ledger.
Likewise, all of the entries in the General Debit and
General Credit columns of the Cash Receipts and Cash Payments Journals have already been posted.

You have only the special amount columns in the Sales, Purchases, Cash Receipts, and Cash
Payments journals left to post. You have also posted all of the amounts from your General Journal
pages 13, 14, and 15, so you can disregard those pages for now.

Before you can begin to post, you need to prove out each journal page. To do this, add all of the
columns down. Then take all of the Debit column totals and add them together. Next, take all of the
Credit column totals and add them together. The total debits must equal the total credits. If not, you
have an error somewhere, and you must find it before you begin posting to the General Ledger.

Once the totals are equal, draw two lines under each total to show that the journal is in balance. You
are now ready to begin posting the column totals.

Let's start with the Sales Journal. Looking at the journal page, you can see that you have three special
amount columns: Accounts Receivable Debit, Sales Credit, and Sales Tax Payable Credit. The column
total for Accounts Receivable Debit is $2,415.00. In the General Ledger, go to the Accounts
Receivable account and enter that amount as a debit (because it is a debit special amount column).

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Figure the new balance in the account by adding this new debit entry to the existing debit balance. Use
SJ12 as the Post Ref. in the General Ledger account.

Then return to the Sales Journal and enter the General Ledger account number for Accounts
Receivable, 1125, in parentheses under the column total. By doing this, you are showing which
account in the General Ledger you posted this amount to.

Continue posting the other two special amount columns—Sales Credit and Sales Tax Payable Credit—
to their respective accounts in the General Ledger, figuring the new account balance after you have
made the entry. Don't forget to go back to the journal and put the General Ledger account number
underneath the amount that you just posted.

Continue posting all of the special amount columns in the other three journals—Purchases, Cash
Receipts, and Cash Payments—in the same manner. Remember, the General Debit and General
Credit column totals are not posted because those amounts have already been posted individually.
You must, however, total those columns in order to check the equality of the debits and credits in the
journal.

Make sure that each of your journals equals out by checking the debit totals with the credit totals. This
is a very important first step in preparing the records for the end-of-the-fiscal-period financial reports.

When you have finished posting from all of the journals, all of the transactions for the month will have
been transferred from the journal to the General Ledger accounts. You are now ready to begin the first
phase of preparing a worksheet.

Chapter 4

Preparing a Worksheet

A worksheet is an accounting form used to summarize the General Ledger information needed to
prepare financial statements. It is the first financial report prepared by a business, and is used to
prepare the other financial reports at the end of the fiscal period.

When preparing a worksheet, various adjustments will be made to some General Ledger accounts to
bring them up to date and prepare them for the beginning of the next fiscal period. It will also show the
net income or net loss of the business for the period. This type of worksheet can be prepared at any
time, but it's usually prepared at the end of the fiscal period for use in preparing other financial reports.

You will need to print two copies of the worksheet form located in the Supplementary Material.
Because there are many General Ledger accounts, the worksheet will occupy two pages. You do not
need to total page 1. Only page 2 will be totaled, but those totals will include all entries from both
pages.

Trial Balance Section of the Worksheet

The first step in preparing a worksheet is to fill in the three lines at

the top of the form. The first line is for the corporation's name:
Teammates, Inc. The second line is for the name of the report:
Worksheet. The third line is for the date: For The Year Ended
December 31. The words For the Year Ended are used because
this report shows the progression of the corporation from the
beginning of the year until the end of the year, as opposed to the
condition of the business on a single date.

Looking at the worksheet form, you will see that there are eight
columns. The first section, Trial Balance, has a Debit and a Credit

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column. The form also has an Account Title column. To prepare

these first two columns, you will need your entire General Ledger.

We'll start at the beginning. Cash is the first General Ledger account, so enter the name Cash in the
Account Title column, and enter the debit balance from the Cash account into column 1, the Trial
Balance Debit column.

Continue on with the next account, which is Petty Cash. Enter the title in the Account Title column and
enter the debit balance from Petty Cash into column 1 of the worksheet, the Debit column. Continue on
until you have listed all of the accounts in the General Ledger and their balances.

If the account has a debit balance, enter it in column 1, Trial Balance Debit. If the account has a credit
balance, enter it in column 2, Trial Balance Credit. Be sure to list all of the account titles even if the
account does not have a balance, because we will be using some of these when calculating our
adjustments.

Once you have entered all of the account balances from the General Ledger into columns 1 and 2, add
these columns down. The totals must agree. This proves the equality of the debits and credits in the
General Ledger. If these totals do not agree, you must find and correct the error before continuing on
with the rest of the worksheet. If you are really stuck, remember that the solution for the worksheet is
located in the Supplementary Material.

Chapter 5

Conclusion

In this lesson, we saw how dividends are distributed to stockholders and learned how to balance
journals and post journal totals to the General Ledger. This work is necessary in preparing accurate,
complete financial reports at the end of the fiscal period.

Because the remaining sections of the worksheet are rather lengthy to explain and complete, we will
continue completing the worksheet in the next lesson. We will continue using the same worksheet form
that you just used in Lesson 8.

In that lesson, you will calculate the adjustments necessary to bring certain General Ledger accounts
up to date for the beginning of the next fiscal period. You will also determine the net income or net loss
of the corporation for the year. In addition, we will complete some of the financial reports for the end of
the current fiscal period. These reports are vital to the corporation and its board of directors for making
sound financial decisions for the upcoming year.

When you are ready, please take the quiz for this lesson. Good luck!

Supplementary Material

Handy's Hardware Example

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The worksheet form you'll be creating for Teammates, Inc. in this
lesson can be pretty complicated. To help you understand where
everything goes and why, take a look at this example that we
created for a different company. Please print it out and keep it close
by while you complete Teammates' worksheet. Hold onto it when
you're finished because you'll want to use it again in Lesson 8.

Lesson 7 Form
/crs/pix/af2/L07-Blank_Opening_Printout.pdf
Here's the two-page blank worksheet form that you'll need to
complete this lesson's work.

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Accounting Fundamentals II: Lesson 7 Page 6 of 6

Lesson 7 Solutions
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All finished? Click here to check your work against this lesson's
solution forms. You can either print them or check the amounts
online. Unfortunately, some of the wider forms can only appear
sideways, so printing may be your better option. If you don't mind
tilting your head, you'll be able to see what you need to see on the
screen while saving some printer ink and paper! Note: Only those
forms and accounts with new entries in them will appear in each
lesson's solutions. If you're curious about a transaction in a
previous lesson, you'll have to go back to that lesson's Solution
link.

How Are Dividends Calculated?

[Link]
This link provides an explanation of how certain types of dividends
are calculated for payment.

FAQs

Q: How is the amount of dividends to be paid determined?

A: The board of directors of the corporation decides on the amount of dividends to be

paid.

Q: How are the members on the board of directors determined?

A: The members of the board of directors are elected by the stockholders of the
corporation.

Q: Why is the worksheet report important?

A: Because it summarizes all of the financial activities of the corporation for the fiscal
period, and it's used to prepare many end-of-fiscal-period financial reports.

Q: What are Retained Earnings?

A: Retained Earnings are monies that the corporation retains to use for the expansion of
the business or other business-related activities.

Q: What is the Capital Stock account used for?

A: The Capital Stock account is where all monies are entered from the sale of shares of
stock.

Course content © 1997-2007 by Charlene Messier. All rights reserved. Reproduction or redistribution
of any course material without prior written permission is prohibited.

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