Account for Dividends

The tax and planning issues associated with declaring and paying dividends are also discussed in more detail later. Here we will look at the accounting for the dividend.

Dividends are handled a little differently than bonuses, because dividends are paid out of retained earnings, not current income. The dividend account should be set up in the equity section instead of the expense section.

A company first declares a dividend payable. All this means is that the company prepares a little paperwork saying that the directors have agreed that dividends will be paid to the shareholders of the company. (If you are a one-person show, you will be both a director and a shareholder.)

There are a couple of important points to note here. First, like the management bonus accrual, the dividend is set up in the books of the company when it is declared, not when it is paid. Second, the dividend affects only the balance sheet, and never the income statement.

The entry to record the dividend accrual is ­

DR Dividends (in the equity section)

CR Shareholder loan

It's not as important to segregate the liability to pay dividends, because there are no withholding tax implications. When the dividend is actually paid, the shareholder loan is debited and cash credited.