Accounting for dividends

[John Edwards]

On Mon, Apr 12, 2010 at 12:46 AM, Paul A. <abrahams at acm.org> wrote:
>
> The thing that makes dividends so tricky is that they are not an expense.
> Treating them as an expense screws up the P&L statement.  Yet you don't
> really want them accumulating in some flavor of an equity account, because
> money paid out in dividends or drawings is not in the business treasury any
> more.

Actually, you do want them in equity. Dividends are an equity
transaction, not an expense. They reduce the amount of equity in the
corporation, and in the end are a reduction in Retained Earnings (the
corporation equivalent of "Owner's Capital, essentially).

The basic transaction for a dividend is a debit to Retained Earnings,
and a credit to Cash. This ends up reducing both.

I can't remember, off the top of my head, if you're supposed to set up
an account called "Dividends Paid" or not. If you do use a separate
account, then you would need to close it to Retained Earnings at the
end of the accounting period.

John

-- 
John Edwards
"You can insure against the weather, but you can't insure against
incompetence, can you?" - Phil Tufnell