Question

Anne Marie, the owner of Anne’s Beauty Salon continues to ask you questions about her financial statements. 1. What is accounts receivable? Is it something good? 2. I see these things called current assets and current liabilities. What are they? Why show them? 3. I still don’t understand what the Statement of Retained Earnings is all about and why do I need it. What is retained earnings? What is that thing called a dividend? Is it an expense? How would you respond to each of these questions?

Answer 1

1)

Accounts receivable are those receivables which are to be received in future either in cash or bank against sale of goods or rendering of services. For example: Say we have sold goods on account to Mr. X worth $1000 and amount is to be received after 2 months. In this case, Mr. X is to shown as accounts receivable for $1000 in the books of company.

Accounts receivable is really good because it is asset for the company and denotes inflow of cash to the company at future date.

2)

Current assets are those assets which are to received within 12 months from the date of reporting by the company.In our above example, Mr. X is shown as accounts receivable and accounts receivable is shown under the head current asset. Examples of current assets are Accounts receivable, Prepaid expenses etc.

Current liabilities are those liabilities which are to be paid or settled within 12 months from the date of reporting. Accounts payable is current liability which is just the opposite of accounts receivable. Example of Current liability are Accounts Payable, Outstanding expenses, Unearned revenue etc.

These are shown in the balance sheet to reflect true and fair view of the transaction of the entity.

3)

Retained Earnings are those earnings which are retained by the company with itself for investment in growth projects. Retained earnings contain past year profit, current year profit and less any dividend declared by the entity.

Statement of Retained Earnings:

Opening Balance:

Add: Current year net income

Less: Dividend declared

Closing Balance:

Dividend is the amount earned by the stocholders on their investment made in the company. For company, dividend is the distribution of profit to the shareholders.

Dividend is not an expense but it is the distribution of profit to the stockholders. It cannot be considered as an expense.