Corporatefinanceinstitute com 1 The Corporate Finance Institute Accounting For more eBooks please visit

corporatefinanceinstitute.com
55
The Corporate Finance Institute
Accounting
More Share Terminology
A few more terms are important in accounting for share-related 
transactions. The number of shares authorized is the number of shares 
that the corporation is allowed to issue according to the company’s 
articles of incorporation. The number of shares issued refers to the 
number of shares issued by the corporation and can be owned by either 
outsiders or by the corporation itself. Finally, the number of shares 
outstanding refers to shares that are owned only by investors while 
shares owned by the issuing corporation are called treasury shares.
The relationship can be visualized as follows:
Shares Authorized ≥ Shares Issued ≥ Shares Outstanding
Where the difference between the shares issued and the shares 
outstanding is equal to the number of treasury shares.
Retained Earnings
Retained Earnings (RE) are a business’ profits that are not distributed as 
dividends to stockholders (shareholders) but instead are allocated for 
investment back into the business. Retained Earnings can be used for 
funding working capital, fixed asset purchases or debt servicing, among 
other things. To calculate retained earnings, the beginning retained 
earning balance is added to the net income or loss and then dividend 
payouts are subtracted. A summary report called a statement of 
retained earnings is also maintained, outlining the changes in retained 
earnings for a specific period.
The Retained Earnings formula is as follows:
Retained Earnings = Beginning Period Retained Earnings + Net 
Income/Loss – Cash Dividends – Stock Dividends 
Dividend Payments
Dividend payments by companies to its stockholders (shareholders) are 
completely discretionary. Companies have no obligation whatsoever to 
pay out dividends until they have been formally declared by the board. 
There are four key dates in terms of dividend payments, two of which 
require specific accounting treatments in terms of journal entries.

---