[GNC] Recording dividend payoffs

[David Cousens]

Hi Justin

I certainly prefer the approach of declaring dividends as a contra acunt to
Retained Earnings and/or debiting it directly to Retained Earnings but it
will require closure of the books to provide retained earnings to handle it
properly.

That said there is nothing technically wrong in accounting terms with having
a dividend expense account which is closed to Retained Earnings. The act of
closing it to the Retained Earnings subtracts the dividend from Equity in
this case. The only difficulty is that the procedure is not as clear in
making it obvious that dividends are paid out of profits.

The problem with how the reports deal with Retained Earnings is another
issue. Retained Earnings is a permanent account of a business. The net
income or profit/loss is only a periodic increment or decrement in that
account value not the value of Retained Earnings itself. GnuCash for the
reporting must calculate Retained Earnings as Income - Expenses calculated
from when the since books are opened. If the dividends are accounted for
with an expense account, then they have been deducted from Retained Earnings
and hence from Equity. However they will not appear as a line item unless
listed in the expenses. Depending on tax rules they may or may not be a
deductible business expense, generally not in most jurisdictions as in most
cases where dividends are paid out of after tax profits. Specific
jurisdictional rules could however prevent using expense accounts to record
dividends.

If I was running a business and using GnuCash,  I would be closing the
Income and Expense accounts to Retained Earnings using the closing procedure
to zero out the temporary accounts. That way the closing transactions are
explicit and as long as the Balance Sheet is calculated at a date after the
transactions for the dividends have been applied they should be reported in
the balance sheet. Using the contra account should allow you to list them
explicitly in a Balance Sheet report if you need to.

David Cousens



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David Cousens
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