[GNC-dev] [GNC] Recording dividend payoffs

Tue Apr 16 10:04:39 EDT 2019

Christopher,

> The "Retained Earnings" part of the Balance Sheet has nothing to do with dividends.
>
> IIUC on the balance sheet date X, the retained earnings simply means the total income up to date X, minus total expenses up to date X.

Don't get me wrong, the 'retained earnings' anywhere in accounting (not just in the balance sheet) should have everything to do with dividends. It's the accounting definition that 'Retained earnings' is the business' net income - cash/stock dividends.

The definition of 'total income minus total expenses' works only for sole proprietorships where the business isn't a legal entity in it's own right. A registered business, however small it is will have at least one shareholder. Most small businesses will have more than one from what I have seen.

> From your description of 'owning a company with shares' / 'selling shares of company' / 'issuing dividends' I honestly have no idea how the books should look like, nor which chart of accounts should apply, nor whether the GnuCash reports are appropriate to produce useful reports.

Oh yes, GnuCash should be able fit in all business, because they all follow the same accounting principles. All we need to do is to calculate 'Retained Earnings' as per the standard accounting formula - it should account for dividends paid.

Understanding which transactions are dividends to account for is a problem.

Dividends are a decrease in equity and can't be recorded in an 'Expense' type account (although that's the current workaround and technically wrong). Therefore what I suggest is to create a dividend account type under equity (equity currently has only 1 type of account) which can be used to record dividend declarations. The value of this account can then be adjusted from total income. This will give us the real 'Retained Earnings'.

Note that: The corresponding journal entry for recording in dividend declaration account is 'dividend payable' (which is a liability account created by user). To record a dividend paid, a second record is created in 'dividend payable' against the journal 'current account' or 'cash account'.

-
Regards,
Justin Mathew
mjustin at protonmail.com

Sent with ProtonMail Secure Email.

‐‐‐‐‐‐‐ Original Message ‐‐‐‐‐‐‐
On Tuesday, April 16, 2019 6:25 PM, Christopher Lam <christopher.lck at gmail.com> wrote:

> The "Retained Earnings" part of the Balance Sheet has nothing to do with dividends.
>
> IIUC on the balance sheet date X, the retained earnings simply means the total income up to date X, minus total expenses up to date X.
>
> If the books were 'closed' on date X, the income&expenses would be zeroed out to Equity:Closing Transactions. This is what Retained Earnings mean to reflect. They suit most sole traders / small businesses very well.
>
> From your description of 'owning a company with shares' / 'selling shares of company' / 'issuing dividends' I honestly have no idea how the books should look like, nor which chart of accounts should apply, nor whether the GnuCash reports are appropriate to produce useful reports.
>
> On Tue, 16 Apr 2019 at 12:39, Justin Mathew via gnucash-user <gnucash-user at gnucash.org> wrote:
>
> > Maf,
> >
> > > you should keep replies on-list, others can contribute and maybe in the future
> > > the thread can save a question being asked in the first place.... "reply All"
> > > in your email client is a good way.
> >
> > Opps, I had read about it, but missed it in the heat of replying.
> > Will keep that mind henceforth.
> >
> > > Closing the books was important in paper days, not so much with digital
> > > accounts where the software can do everything quickly & repeatably., IMHO
> > > closing books isn't really needed any more, as long as you keep secure backups
> > > & reports etc for traceablity over the years.
> >
> > Yes, I read this suggestion in gnu tutorial and concepts manual few hours ago infact. I am new to accounting to be honest. Just learning it with a fictitious company and transactions.
> >
> > > I have a part of the expenses tree that is something like "non-taxable". so
> > > expenses:non-taxable:dividends or :corporationTax etc. Easy to exclude the
> > > whole branch from reports rather than ad-hoc accounts.
> >
> > And I didn't know that feature existed.
> >
> > > whereas your earlier reference says that dividends are paid from a temproary
> > > equity account that reduces retained earnings. (sounds like an "expense"
> > > (english sense, not formal GAAP definition) to me, in that both sorts of
> > > payment reduce retained earnings - just that dividends are after the profit &
> > > tax calcs are done)
> >
> > That's a good way to think. And I guess, this is the only workaround at the moment. It does 'sounds' like expense but I am not too sure to say that it 'is' expense.
> >
> > I don't know if I can call this a bug; but this isn't the technically correct behavior. GnuCash is intended to be used in accounting spheres regulated by different govts and laws. And because of this, GnuCash should treat dividend payoffs in the standardized and technically correct way ie, a dividend declaration account that is a part of 'equity' which reduces the 'retained earnings' in reports.
> >
> > Anyway, let the more experienced development team make a call on this. I shall raise this with the dev team as well. I am alao copying this to gnucash-devel at gnucash.org. I am not a part of the dev mailing lists, but I guess this will reach them.
> >
> > -
> > Regards,
> > Justin Mathew
> > mjustin at protonmail.com
> >
> > Sent with ProtonMail Secure Email.
> >
> > ‐‐‐‐‐‐‐ Original Message ‐‐‐‐‐‐‐
> > On Tuesday, April 16, 2019 5:34 PM, Maf. King <maf at chilwell.net> wrote:
> >
> > > Hi Justin,
> > >
> > > you should keep replies on-list, others can contribute and maybe in the future
> > > the thread can save a question being asked in the first place.... "reply All"
> > > in your email client is a good way.
> > >
> > > I think it is a bit of a technical distinction, GAAP left over from the days
> > > of paper books. Formally, expenses are a (set of ) temporary equity
> > > account(s) that should be closed (or zeroed) to a retained earnings equity
> > > account each year - to give a profit figure.
> > >
> > > whereas your earlier reference says that dividends are paid from a temproary
> > > equity account that reduces retained earnings. (sounds like an "expense"
> > > (english sense, not formal GAAP definition) to me, in that both sorts of
> > > payment reduce retained earnings - just that dividends are after the profit &
> > > tax calcs are done)
> > >
> > > Closing the books was important in paper days, not so much with digital
> > > accounts where the software can do everything quickly & repeatably., IMHO
> > > closing books isn't really needed any more, as long as you keep secure backups
> > > & reports etc for traceablity over the years.
> > >
> > > I have a part of the expenses tree that is something like "non-taxable". so
> > > expenses:non-taxable:dividends or :corporationTax etc. Easy to exclude the
> > > whole branch from reports rather than ad-hoc accounts.
> > >
> > > If you think that it is a bug / sub-optimal behaviour, by all means submit a
> > > bug report or RFE for the devs to comment on. They know far more than me
> > > about the GC architecture decisions etc.
> > >
> > > Maf.
> > >
> > > On Tuesday, 16 April 2019 12:21:52 BST Justin Mathew wrote:
> > >
> > > > Yes, that seems to be the only way now. Gnucash doesn't complain if we do
> > > > that way. And you're indeed lucky that you're accountant doesn't complain.
> > > > :)
> > > > To think from a larger perspective now, I think GnuCash should to handle
> > > > dividends the right way; primarily because dividend isn't technically an
> > > > expense of the business and marking it as an expense will only create
> > > > issues later (eg, inaccurate certain expense reports, wrong analytics,
> > > > etc.).
> > > > If this behavior isn't because of the way we (users) are doing it, shall I
> > > > notify in the development list to consider this as an error and correct it?
> > > >
> > > > -
> > > >
> > > > Regards,
> > > > Justin Mathew
> > > > mjustin at protonmail.com
> > > > Sent with ProtonMail Secure Email.
> > > > ‐‐‐‐‐‐‐ Original Message ‐‐‐‐‐‐‐
> > > > On Tuesday, April 16, 2019 4:42 PM, Maf. King maf at chilwell.net wrote:
> > > >
> > > > > Hi Justin,
> > > > > while it is contrary to the advice given in the link you supplied, I've
> > > > > always recorded dividend payouts as an Expense - but it is one of a
> > > > > handful that are excluded from the corporation tax calc, as they are
> > > > > declared after tax / from profits.
> > > > > My accountant has never complained - UK regs - YMMV, of course!
> > > > > Maf.
> > >
> > > --
> > >
> > > Maf. King
> > > PGP Key fingerprint = 8D68 A91F 733B 2C1F 43B7 2B7C E591 E8E1 0DE7 C542
> >
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