Liquidating dividends effect on retained earnings
whether it has distributed them as dividends or reinvested them in the business).
When reinvested, those retained earnings are reflected as increases to assets (which could include cash) or reductions to liabilities on the balance sheet.
A stockholders' deficit does not mean that stockholders owe money to the corporation as they own only its net assets and are not accountable for its liabilities, though it is one of the definitions of insolvency.
It means that the value of the assets of the company must rise above its liabilities before the stockholders hold positive equity value in the company.
Due to the nature of double-entry accrual accounting, retained earnings do not represent surplus cash available to a company.
Rather, they represent how the company has managed its profits (i.e.
It also represents the residual value of assets minus liabilities.
Dividends can only be paid out of the positive balance of the retained earnings account at the time that payment is to be made.
In accounting, the retained earnings at the end of one accounting period is the opening retained earnings in the next period, to which is added the net income or net loss for that period and from which is deducted the bonus shares issued in the year and dividends paid in that period.
Higher income taxpayers could "park" income inside a private company instead of being paid out as a dividend and then taxed at the individual rates.
To remove this tax benefit, some jurisdictions impose an "undistributed profits tax" on retained earnings of private companies, usually at the highest individual marginal tax rate.