Where to record dividends

Huge thank you for this amazing piece of software! It really has made my accounting a whole heap easier!

Just wondering if you can point me in the direction of where to log a directors dividend payment?

Firstly to make sure we are referring to the same issue, it is shareholders that receive dividends, not directors but I assume in your case the director is also the shareholder. The quick way of recording dividends is to create a new account named Dividends under Equity through Chart of Accounts that can be found in Settings.

If you would like to avail yourself of the advanced Manager reporting features you can also enable Capital Accounts under Settings then create the member and Dividends as a sub account. When you record the dividend under Spend Money you would select Capital Accounts as the account, select the Member and select the sub account Dividends. You can then view the report named Statement of Changes in Capital Accounts under Reports. In the case of a company the report should be renamed to Statement of Changes in Equity.

Great thanks so much for the advice!

I am not sure if I am doing this correctly.

What I have done is added Capital Accounts. Then in chart of accounts, I have edited Capital Sub Accounts and Created Dividends, Funds Contributed and Share of Profits. I then went to Capital Accounts Tab and created myself as a member.

Now I can go to bank, spend money, select Capital Accounts, member account and then Dividends and select amount.

What this does is I am recording paying x amount in dividends to my member account and it shows up in the Dividends Sub Capital Account.

However, I am seeing two issues. What do I do if I want to allocate a divdidend to a member account, but not pay the dividend at this present time. I cannot work out how to do that! Secondly, in Capital Accounts I am seeing paid in advance (the amount that I have spent on the bank, but nothing in amount to pay - so its basically the same point as issue one. I need to issue dividends to the member account and then I need to pay the relevant member from the bank. I can pay the member, but I can’t work out how to issue the dividend to member without paying them!

How do you do this in Manager?

First, is your company organized as a corporation, stock company, or whatever that form of organization is called in your jurisdiction? In other words, do you have shareholders and is individual liability of shareholders limited? If not, you should not be paying dividends. If you are a partnership, you can still use capital accounts, but payments are usually called distributions or draws. If you are a sole trader or proprietor, you can use a capital account, but that is an unnecessary complication, since everything the company owns already belongs to you. Again, what you pay yourself would be a draw.

Regardless of the from of organization, you don’t record a dividend, distribution, or draw until it is actually paid, because the money would still be in the bank. You can allocate funds to a capital account, which will show how much the organization owes the member, but there is no transaction to record until a dividend/draw is paid.

Its a limited company so has directors and shareholders.

This is what I am trying to do - allocate funds to a capital account. All I seem to be able to do is pay a dividend to a member in the capital account. How do you allocate funds to a capital account whiich will show how much the organisation owes the member?

If you want to increase a member’s capital account, use a journal entry. Assuming you have your chart of accounts set up appropriately, you would be transferring from retained earnings (meaning the company holds the profit) to the member’s capital account (signifying the member owns the profit).

As a corporation you only allocate funds to a capital account if you are going to be issuing more shares. If the corporation issued 100 shares @ 10 each then the capital account would be 1000 and never changes unless more shares are issued

Dividends (similarly corporation tax) are a distribution of earnings, so the standard procedure is via a Journal - Debit Retained Earning and Credit (liability acct) Provision for Dividends. Its a liability account as there is an obligation to pay the shareholder, who for this purposes becomes a creditor.

At the corporations AGM the Dividend is proposed by motion and if approved/ratified becomes payable. If the dividend is to be paid then Bank - Spend Money with allocation to Provision for Dividends. If the dividend isn’t going to be paid then Journal - Debit Provision for Dividends and Credit (liability account) Shareholders Loans. The unpaid dividend should never be “stored” in the BS Equity section…[quote=“dalacor, post:4, topic:1163”]
What I have done is added Capital Accounts. Then in chart of accounts, I have edited Capital Sub Accounts and Created Dividends, Funds Contributed and Share of Profits

For a corporation none of these accounts should ever be created in the BS Equity section, this section should only contain issued shares capital account(s) and retained earnings. You can choose between using or not using the Manager’s Capital Tab. If you only have a few shareholders it probably cleaner/simpler to not use the control/sub-accounts. Just create via COA a capital account for each shareholder which equals their paid up issued shares

Dividends has been covered above. Funds Contributed - What are these funds? To purchase shares, use above capital accounts. Advances which will be either be repaid or not converted into issued shares, use Shareholders Loan account. It maybe intend that these funds have a sense of permanency but unless they are actually converted into issued shares they remain a loan for accounting purposes. Share of Profits - the profits (retained earnings) belong to the corporation as the legal entity not the shareholders. The corporation shares the profits by Dividend distributions.

Actually, all forms of organization declare their distributions in their year end accounts. The actual physical payment of a distribution may never occur. A public company in its annual published accounts discloses its intend distribution (dividend) and is not payable until some future date. Companies which have “dividend re-investment” schemes, never pay out as they issue shares in lieu. A partnership needs to declare their distribution otherwise the partners will never know what income to declare on their individual tax returns. A sole traders distribution is their annual profit. In both partnership/sole traders any salaries or drawing taken throughout the year are part payments towards their distributions.

In a corporation you never allocate funds to a capital account unless you are issuing shares. Any allocation of funds other then issuing shares should always be to a Shareholders Loan account.

Corporations and Shareholders are separate legal entities, so it farcical to suggest that somehow the ownership of profit belonging to the corporation can be transferred to the shareholders while that profit still remains within the corporation. To repeat, dividends are the only mechanism for profit distribution. Perhaps you are confusing partnership equity with corporation equity

I am beginning to understand why people like Tut say that when I as an IT Technician talk about computers it seems so easy for me, but is greek to a lot of people while some people can sort of understand what I am saying.

Reading your post Brucanna, I felt the same way. I kind of sort of understand what you are saying, but its slightly over my head a bit as you are talking about concepts that I am not familiar with.

Let me make my position clear.

I am in the UK and the company is a limited Company with myself as the sole director/shareholder/employee.

So I pay myself a salary every month that is under the PAYE amount and every year I would pay myself a dividend out of the company profits.

So what I have done is added the employee and payslips tabs and added myself as an employee. I then create a payslip every month consisting of salary and NIC. I then go to bank spend money and pay the salary and allocate to my employee account. The Nic’s is allocated to something called payroll liabilities. I also pay HMRC (every quarter) the NIC’s using bank spend and it does the counter entry for Payroll Liabilities thus reducing it to zero every quarter.

I also do the same procedure with petrol and with with heating and lighting allowance. I put petrol on the payslip, then go to bank spend money and allocate the money paid to my employee account.

I trust that I have done this correctly with dealing with myself as an employee!

Now to deal with myself as a director and or shareholder. There are three considerations that I want to address here. As a shareholder I want to pay myself an annual dividend. As a director I might want to take a directors loan (money out of the company) or give a directors loan (put money into the company as a loan to be paid back).

Dealing with the dividend, I am a shareholder and the procedure is two steps if I have understood you correctly. I need to debit retained earnings and credit Dividends (This will declare the dividend i.e. put it on the books) and then I need to pay the dividend, which I would do by going to bank spend and select Dividends.

However, if I want to declare the dividend, but not pay it at this present time, then I need to debit retained earnings and credit Dividends, then I need to debit Dividends and credit Directors Loan. I could technically create a shareholders loan, but for the sake of simplicity as I am also a director, it would make sense to have one loan account for myself.

Dividends, Shareholders Loans are both liabilities account if I have got you right?

Now if I want to give a loan to the company, I would need to receive money and credit shareholders loan account and if I want to take a loan out of the company, I would need to debit shareholders loan One scenario that I would find useful at the moment is to borrow money from the company in the first few months of the tax year and then when I receive dividends pay back the shareholders loan and pay the balance in dividends.

What I would need to do is debit retained earnings and credit Dividends. Then I would need to spend money and debit dividends for the balance left over after paying the directors loan. The problem I am seeing here is that I would need to debit Dividends to pay the balance of the dividend, but I know that to pay the shareholders loan I would need to debit this account but I clearly cannot have two debits!

I wonder if Lubos has plans for creating a shareholders/directors tab like employees so that we can do dividends, directors loans and shareholders loans in a similar way to the way we do employees and payslips as that would be much easier.

I will delete the Funds Contributed (which I had put in for directors loans to the company). I had thought that dividends would debit/credit Share of profits, but I clearly misunderstood what I was told, so I will delete Capital Accounts as I clearly don’t need this tab.

I am going to be meeting up with my accountant next week after she has done the year end return and together we will go through this particular issue (as well as a general overview of my accounts) as this is one area where my knowledge is quite weak. I just wanted to make sure that I understood the concepts before going to meet up with her as I don’t want her to just show me what to do, I want to understand how it works!

But I think that you have explained it very well, although I had to read it a few times in order to understand the concepts you were talking about.

Actually turned out to be really simple to do journal entries. I was expecting it to be difficult, but was really straightforward. I will get my accountant to check and see if I have done everything correctly.

You have got the entire assumptions and processes in one and those Journals can be your friend.

Why can’t you - this is exactly what you would be doing when you stated “Then I would need to spend money and debit (2nd) dividends for the balance left over after paying the directors loan” - the 1st debit. You could, when the dividend becomes payable, just transfer the whole dividend to Shareholders Loan then you only need to consider cash flow movements.

Just run the one loan account, my preference would be Shareholders Loans, as they receive dividends and fund operations whereas a Director could be a non-shareholder. Also, the Equity capital account for a corporation should be called “Issued Capital” - just to impress the accountant.

Sorry the concepts regarding dividends weren’t as clear as first intended but the correction of corporation capital account allocations compounded the response.

I was taught in accounting that for every debit there is a corresponding credit which was why I thought that it can’t be correct to debit the shareholders loan and debit the dividends account!

Yes I see when you spend money you are debiting the bank account aren’t you, so naturally there is a double debit for paying dividends.

Do I need the Equity Capital Account - I have just got retained earnings in Equity.

Don’t worry, dividends, shareholders, directors, capital, loans etc - very complicated area because so many people confuse one aspect with another - for example as you say its commonly thought that you pay a director a dividend which is not correct. You pay a shareholder who happens to also be a director a dividend! But its easy to get muddled up with all that.

To create a company you need to issue shares, otherwise what identifies ownership - even if only 1 share. If you ever sold your business/company, you would transfer the ownership of the share(s). Regardless of how you obtained the company (created from scratch or purchased a shelf company) a company can’t be formed without a share being issued.

A while back you posed a question regarding the provision for corporation tax. Well to be technically correct the accounting treatment for dividends is similar and to really, really impress the accountant.

This way the provisions are transparent, rather then adjustments within Retained Earning. Before the computerisation of accounting the P&L Statement & P&L Appropriations Account were two separate reports.

PS: in your last post you meant - crediting the bank

Actually I did mean debit - I got it the wrong way around :blush:

I will get my accountant to look into the Equity Capital Account as I don’t know how many shares the company was formed with.

I am intending to have corporation tax in the same section as Dividends, but looking at your picture and text, it would seem that you have your Corporation Tax and Dvidends in the Profit and Loss Expenses Section rather than in the Liabilities section. Telephone for example is an expense not a liability so judging from your pictures it would seem that you have put Dividends in Expenses not Liabilities.

I have just created a group called Employee and Shareholder Liabilities and in that group I created Dividends, Payroll Liabilities and Employee Clearing Account although I will move the Payroll Liabilities to the Taxes and Credits Group I think.

Sorry, I should have been clearer.
Instead of the Dividend Journal being Debit Retained Earnings and Credit Provision For Dividends it would be
Debit P&L App Dividends and Credit Provision for Dividends - so your liability accounts are correct as they are.

This way, the “expense” of the corporation tax and dividends are shown clearly in the P&L (like telephone) rather then being hidden deductions within the retained earning account. It just a more transparent approach.

There is a report called Statement of Changes in Equity which is addressing the issue though. The purpose of this report is to explain movements within individual equity accounts.

In the end, it’s up to personal preference. Both methods are valid in my view.

I will get my accountant to decide how best to do this, but my personal opinion would be to use the Statement of Changes in Equity report to track movements within equity. I am not keen on putting liabilities in the profit and loss statement because its a liability, not an expense and it actually makes it more complicated to view actual company profit as you would then have to start excluding “expenses” such as corporation tax and dividends etcfor end of year return. I think the equity report should be fine as that should cover dividends and corporation tax whenever I need to actually know about that. Thanks

You are not putting Liability accounts in the P&L. The debit leg of corporation tax/dividend is an expense and that is posted to the P&L, like any other expense. The credit leg still goes to their respective Liability account and stays in the BS.

@Brucanna. I hope that you were suitably impressed with my accounting skills in the corporation tax topic. I think that what I have done covers all bases. However, my accountant has done it differently for dividends although you suggested using the same treatment for both.

What my accountant did for Dividends is very different from what you have recommended in your first post in this topic - ie Debit Retained Earnings and Credit Dividends in Liabilities. Instead what she has done is created Dividends in Equity and we did spend bank and selected Dividends in Equity as I wanted to pay the dividend out immediately as well as declaring it.

I have decided that I like having Corporation Tax in the Profit and Loss, but as a separate section as described in my post because this easily enables me to see company pre tax and post tax profits and its also a concept that most accountants are familiar with.

I kind of feel that Dividends being an expense in your P&L Appropriations sections doesn’t work for me as dividends is somewhat different from corporation tax in the sense that corporation tax is an expense in the sense that its a bill that I have to pay so it does actually reduce my profit, whereas dividends is more sharing of the profit, so it makes more sense to have the dividends in the Equity Section where is where she has put it.

As Lubos has mentioned that I can use the statement of changes in Equity to track whats going on there per year, its not a major issue, although I have emailed the accountant to ask if its possible to “clear” the dividend each year otherwise every single years dividends will show up on the balance sheet! Thats one advantage of your suggestion of using the P&L Appropriations.

My accountant created an equity account called Share Capital and we allocated the money in a journal entry between Share Capital and Directors Loan Account (Liability Account).

In the next accounting year, I think I will be doing a journal entry for Dividends in that I will be debiting Directors Loan Account in liabilities and Crediting Dividends in Equity or something along those lines! I will ask her about having a Dividends in Equity and in Liabilities as you suggested to create a provision for Dividends as I like the two step process where you declare the corporation tax or dividend and then you pay the dividend or corporation tax, so I might ask her why she has not advised creating a provision for dividends in liabilities as I think that you are correct in this approach.

So your retained earnings balance and dividends balance will keep increasing indefinitely?

When declaring dividends, always debit Retained earnings account and have it shown on Statement of Changes in Equity report or have an expense account in P&L appropriation section as @Brucanna has suggested.