How to Account for a Retained Earnings Statement for Preferred Stock

Accounting

Preferred stock--stock which receives dividends before common stock--has no voting rights. The major types of preferred stock include cumulative, callable, and convertible. Cumulative preferred stock is stock which will always receive dividends, even if a company withholds dividends one year; callable preferred stock is stock the company may buy back at a future date at a set price; and convertible preferred stock is stock the owner can convert into common stock, usually receiving two or more shares for one share of preferred stock.

Instructions

Issuing Preferred Stock

1. Debit cash and credit preferred stock if the company issued preferred stock at par value. Par value is the face value of the stock.

2. If the company issued preferred stock above par value, you should debit cash, credit preferred stock at its par value, and credit additional paid in capital the difference between cash received and preferred stock at par value. The cash received is the amount paid for the preferred stock; the value of the preferred stock at par value equals the amount of preferred stock sold, multiplied by the stock's par value. The difference between cash received and the par value of the stock equals the additional paid in capital of the preferred stock.

3. Disclose any characteristics of the preferred stock next to the preferred stock account on the statement of retained earnings. Characteristics of preferred stock include--but are not limited to--cumulative, callable, and convertible.

Declaring Dividends

1. When declaring dividends, debit retained earnings and credit dividends payable.

2. Ignore any facts about the record date. The record date is the date a company decides who qualifies to receive dividends.

3. Debit dividends payable and credit cash when paying dividends.

References

• Investopedia: Preferred Stock Basics
• Investopedia: Par Value
• Investopedia: Preferred Stock