[GNC-dev] [GNC] Recording dividend payoffs

[John Ralls]

Frank and Justin,

The wikipedia article doesn't explain it very well. Here's a better one:
https://www.investopedia.com/ask/answers/070615/what-difference-between-earnings-and-income.asp. "Net Income" is for this period, "Retained Earnings" is for the life of the entity. (Though note that under US GAAP nonprofits aren't supposed to have "retained earnings", https://www.nonprofitaccountingbasics.org/reporting-operations/statement-financial-activities. I suspect that the IFRS rules are similar.)

Another way to look at it is that there are (in the simple case) three sources for the assets of an entity: Liabilities represent money borrowed from others, Equity:Paid in Capital is the money provided by the investors or owners for part ownership of the entity, and retained earnings is the profit or loss made by the entity since its creation.

Dividends can dr (remember it's equity so dr *reduces* the balance) either paid in capital, in which case they're called capital dividends or return of capital, or earnings, called ordinary dividends. See https://www.investopedia.com/terms/c/capital-dividend.asp. As I said much earlier, in a formal system ordinary dividends will dr Retained Earnings.

The problem that Justin keeps banging on about is that he doesn't want to have a Retained Earnings account because that would mean that he has to close his book periodically to fund the account. That's fair, we tell people all the time that closing the books is optional in GnuCash. But without a Retained Earnings account, what to dr to balance the cr of assets to pay the dividend?
The GnuCash answer is an expense account, but Justin doesn't like that. He seems to want a special Equity contra-account for ordinary dividends--though he confused it with declared/authorized dividends which is a liability suspense account for the time between the board declaring the dividend and actually writing the checks and crediting the asset account--and he wants the Balance Sheet report to know about it and reduce the Retained Earnings line by the equity account value.

I don't think that there's a good reason to do that. GnuCash's declared "market" is individuals and sole proprietorships, neither of which pay dividends. It's pretty simple to create a dividends account of type expense that the Balance Sheet's retained earnings calculation will see, and to exclude that account from the Profit and Loss report so that It accurately states the period's operations. The claim that it violates the formal rules fails because it's only required when one doesn't follow the formal rules and close Income and Expense to Retained Earnings: In for a penny, in for a pound.

Regards,
John Ralls




> On Apr 17, 2019, at 9:03 AM, Justin Mathew <mjustin at protonmail.com> wrote:
> 
> Just to add to it,
> 
>> https://en.wikipedia.org/wiki/Retained_earnings: The retained earnings
>> of a corporation is the accumulated net income of the corporation that
>> is retained by the corporation at a particular point of time, such as at
>> the end of the reporting period. ...
>> 
>> https://dictionary.cambridge.org/de/worterbuch/englisch/retained-earnings:
>> the part of a company’s profit in a particular period that it decides to
>> keep, rather than paying it to shareholders as a dividend
> 
> And at some point if dividends are paid to shareholders, the retained earning should account for that as well.
> 
> Many at time, small businesses pay dividends as a method of steady income to shareholders. They don't divide the entire profit though. Hence the business will still have retained earnings after dividends.
> 
> -
> Regards,
> Justin Mathew
> mjustin at protonmail.com
> 
> Sent with ProtonMail Secure Email.
> 
> ‐‐‐‐‐‐‐ Original Message ‐‐‐‐‐‐‐
> On Wednesday, April 17, 2019 8:37 PM, Frank H. Ellenberger <frank.h.ellenberger at gmail.com> wrote:
> 
>> John,
>> 
>> the issue is not about reports or accounts, but the term "retained
>> earnings". While for the "normal" private user (and our original
>> programmers) it may be seen as synonym for "net income", for business
>> users it is more specific: The amount of the net income, which is for
>> several reasons (juristic, ...) transferred to the next period.
>> 
>> Example: There is a pending discussion with a client about the quality
>> of our sold product. He claims his money back.
>> 
>> IMHO we should rename, what currently is called "retained earnings" in
>> GnuCash to "net income". I have no specific opinion about the account
>> names in our english and norsk templates .
>> 
>> My estimation is based on
>> https://dict.leo.org/englisch-deutsch/retained earnings
>> 
>> https://en.wikipedia.org/wiki/Retained_earnings: The retained earnings
>> of a corporation is the accumulated net income of the corporation that
>> is retained by the corporation at a particular point of time, such as at
>> the end of the reporting period. ...
>> 
>> https://dictionary.cambridge.org/de/worterbuch/englisch/retained-earnings:
>> the part of a company’s profit in a particular period that it decides to
>> keep, rather than paying it to shareholders as a dividend
>> 
>> Regards
>> Frank
>> 
>> Am 17.04.19 um 01:24 schrieb John Ralls:
>> 
>>> Justin,
>>> No, just you. This is real simple: GnuCash provides two ways to account for reporting retained earnings, including dividends. I'm not asking you to do anything, I'm telling you how GnuCash works. Either you use one of those two ways or you use a different accounting program.
>>> Regards,
>>> John Ralls