[GNC-dev] [GNC] Recording dividend payoffs

Frank H. Ellenberger frank.h.ellenberger at gmail.com
Fri Apr 19 07:05:55 EDT 2019


Am 18.04.19 um 06:06 schrieb 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.

You are missing the *put aside or saved for future use*.

> (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.)

So why are we using in our reports a legal termin, which is not
applicable for most users?

> 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.

Not closing the book might be be fine for pure personal reporting.
Already if you start
preparing the tax declaration, depending on your legislation, you  may
be forced to enter adjustment entries (splits in tax free and taxable
amounts, depreciation, ...). So from my feeling it was always better to
do a full manual closing of the book according local law. In the
german business templates ~1/10 of
all accounts are related to the closing book process.

> 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.

The issue here seems that in C the common template tries to be for both,
private and business users. For other, mostly european countries we have
separate templates for business users, based on the requirements of the
government or other authoritative organizations.

Probably something similar exists for the US?

> 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.

I think the legal form does not matter. Also people sharing a flat might
decide to set some "profit" aside for renovation or a new energy
efficient refrigator (= retained earnings) and pay back the other part
(of their "net income") like a dividend.

> 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


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