Dividends in accounting – how to record income and distributions? (0)
Dividends in accounting are recorded using the same principles as any other accounting entry. If a company receives dividends, they are considered income, and income increases on the credit side. If a company distributes dividends, they can be thought of as expenses, which belong on the debit side.
In accounting, dividends are recorded in the financial year during which the underlying financial statements are approved and the decision to distribute dividends is made. For example, in 2022 dividends are distributed based on the 2021 financial statements, and once the general meeting has decided on the distribution, the dividends can be recorded in 2022.
Payment of dividends
It makes no difference whether dividends are paid to the entrepreneur personally or to someone else – in accounting, dividends behave exactly the same way.Example:
Onni Shareholder pays himself dividends of 3,000€, with a withholding tax of 225€. After taxes, 2,775€ is transferred to Onni’s bank account. In SimplBooks, the entries would look like this:
– DEBIT 3,000€ → Balance sheet, dividends payable (or retained earnings/losses from previous years)
– CREDIT 225€ → Balance sheet, withholding tax liabilities
– CREDIT 2,775€ → Balance sheet, dividend liabilities (since the company owes this to the shareholder)
When the 2,775€ dividend is later paid, the entry is as follows:
– DEBIT 2,775€ → Dividend liabilities (bringing the account to zero)
– CREDIT 2,775€ → Balance sheet, bank account (or wherever the dividend was paid from)
The withholding tax liability remains on its account until it is paid. Once paid, the entry is: DEBIT withholding tax liability (zeroing the account) and CREDIT the bank account.
Receiving dividends in cash
A company can receive dividends either in cash or in another form, such as shares. If the company receives dividend income in cash, dividends are treated like any other income. They are recorded as:
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DEBIT balance sheet, bank account
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CREDIT income statement, dividend income
In SimplBooks, the entry would look just like this.
Receiving dividends in shares
Sometimes dividends are paid in the form of shares and their accounting treatment depends on whether the recipient engages in securities trading. Shares are assigned a fair value at the time the dividend becomes available and this is the value used for both the dividend income entry and the balance sheet entry.
It’s important to note that a company receiving shares as dividends is liable for transfer tax on those shares, and the tax paid becomes part of the acquisition cost of the shares (i.e., the value at which the asset is recorded).
Dividends in shares without securities trading
If a company receives shares as dividends and does not engage in securities trading, the shares are recorded under fixed assets investments on the balance sheet and dividend income in the income statement.
If the shares are later sold, the entry is a debit to the bank account and a credit to fixed asset investments. In this way, the investments account is cleared with respect to those shares and they are no longer in the accounting records.
Usually, shares are sold at a different price than they were acquired for, and depending on this, the sales price of the shares will result in either a gain or a loss on sale, which must be taken into account when recording the transaction.
Dividends in the form of shares and securities trading
If a company engages in securities trading and receives shares as dividends, the entry is slightly different. The final placement of the shares in the accounting records is inventory, but they cannot be recorded directly there, because the corresponding account can only be the inventory change account.
The entry must therefore be made in two parts. The amount is first credited to dividend income in the income statement to increase income, with a corresponding debit to purchases in the income statement. The second entry is a credit to inventory change in the income statement and a debit to inventory in the balance sheet.
Thus, the final placement of the other side of the dividend income entry is inventory, but since it cannot be recorded directly there, it must be routed through purchases and inventory change. Inventory change affects the amount of purchases by either increasing or decreasing them, so in principle, the entries for purchases and inventory change cancel each other out.
When these shares are later sold, the sale is also recorded in two parts. The sale constitutes revenue for the company, so the first entry is a normal sales entry: a debit to the bank account and a credit to the sales account. The second entry clears the shares from the balance sheet, so the entry is made at the acquisition cost of the shares: a debit to inventory change and a credit to inventory.
If a company engages in securities trading and sells its owned shares, no separate capital gain (or loss) arises, because the sale is always recorded directly as revenue.
Dividends in accounting are not more complicated than any other income or expense. Receiving dividend income in the form of shares can cause some confusion, whether securities trading is conducted or not. But it is manageable as long as one takes the time to properly understand the subject. With the rule of thumb that income increases on the credit side and expenses on the debit side, one can already go a long way — even in this matter!
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