Accounting Chapter 25 • Three principal differences between

Chapter 25
Three principal differences between accounting for a proprietorship or
partnership and accounting for a corporation:
• Different accounts are used to record owners’ equity
• Different procedures are used to distribute income to owners
• Corporations calculate and pay federal income taxes
Corporations must pay federal income tax on the net income
Proprietorship and partnership net income is treated as part of each
owner’s personal income for income tax purposes
Section 1
A corporation’s ownership is divided into unite – share of stock
Stockholder: an owner of one or more shares of a corporation and is an
owner of a corporation
A separate owner’s equity account is not maintained for each owner of a
corporation – use Capital Stock account
Owner’s equity accounts for a corporation are listed in the Stockholder’s
Equity division
A second Stockholder’s equity account is used to record a corporations
Retained Earnings: an amount earned by a corporation and not yet
distributed to stockholders
Net Income increase a corporations total stockholder equity
A third stockholder’s equity account is used to record the distribution of a
corporations’ earnings to stockholders
Dividends: earnings distributed to stockholders
Divided account is a temporary account like a drawing account and is
debited each time a dividend is declared
At the end of each fiscal period, the balance in the dividends account is
closed to Retained Earnings
Board of Directors: a group of persons elected by the stockholders to
manage a corporation
Dividends can only be distributed if the board formally does it
Declaring a dividend: action by a board of directors to distribute
corporate earnings to stockholders
Dividend are normally declared on one date and paid on a later date
Once declared must be paid out but there is no requirement to declare a
The declared dividend is a liability that must be recorded in the
corporations accounts
When a dividend is declared Dividends is debited and Dividends Payable is
To find the amount: # of shares outstanding x Dividend per Share = Total
One check is issued for the total amount of dividends to a special checking
account then individual checks are written to the stockholders (just like
Paying the dividend: debit Dividends Payable and credit Cash in the CP
Section 2
Businesses use worksheets to plan adjustments and provide information
needed to prepare financial statements
Do Trial Balance on worksheet
Make adjustments to the following accounts
o Interest Income
o Uncollectible Accounts Expense
o Merchandise Inventory
o Supplies
o Prepaid Insurance
o Depreciation Expense – Office Equipment
o Depreciation Expense – Store Equipment
o Interest Expense
o Federal Income Tax Expense
Interest Income – credit & Interest Receivable – debit
Uncollectible Account Expense – debit & Allowance for Uncollectible
Accounts – credit
Merchandise Inventory & Income Summary (Ending Merchandise
Inventory – Beginning Merchandise Inventory = Adjustment) If Ending is
higher then debit Merchandise Inventory and credit Income Summary. If
Beginning is higher then credit Merchandise Inventory and debit Income
Supplies – credit & Supplies Expense – debit
Prepaid Insurance – credit & Insurance Expense – debit
Depreciation Expense – debit & Accumulated Store or Office Depreciation
– credit
Interest Expense – debit & Interest Payable – credit
Section 3
Corporations anticipating annual federal income taxes of $500 or more are
required to pay their estimated taxes each quarter – April, June,
September, and December
The actual federal income tax owed is calculated at the end of the fiscal
year and an annual return is filed
Any additional tax owed is sent with the return
Each tax payment is a debit to Federal Income Tax Expense and a credit
to cash
FITE – is an expense under Income Tax Expense in Chart of Accounts
Federal Income Tax Payable is a liability and is listed under Current
Liabilities in the Chart of Accounts
To figure FITE must first complete the work sheet by doing all the
adjustments except for Federal Income Tax Expense, completing the
extensions and figure net income based on Income Statement columns
(do not write in the actual work sheet – there is a special form for this)
Then use the tax rate table provided by government to figure tax expense
– see page 649 for steps
Federal Income Tax Adjustments
• Calculate the amount of federal income tax adjustments (Difference
between federal income tax owed and how much already paid)
debit FITE and credit FITP and label (i)
• Total and rule adjustments columns
• Extend FITE to IS and FITP to BS
• Complete the work sheet like before but write Net Income after
Federal Income Tax instead of just Net Income