The process of issuing dividend?

The process of issuing dividend?

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Hi there

I'm struggling with the practical application of issuing dividends can anyone advise on the best course of action and correct me when I'm wrong?

It is my understanding that when issuing a dividend you take: 

Net income - Corporation Tax = distributable profit

Distributable profit - dividend = retained earnings to be carried forward

Is all that right?  Net income doesn't change it stays the same above the line right? So in what account is net income sitting or being pulled into that I can then make debits and credits against it? 

Is is pulled straight into retained earnings and I should be debiting retained earnings and crediting directors loan account or cash? 

I'm really confused as to the actual practical application of it and any help would be hugely appreciated

KR

Adam

Replies (6)

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By johngroganjga
13th Dec 2013 14:03

After tax profit is transferred each year from the profit and loss account to retained profits.

Whenever the cumulative balance on retained profits is in credit a dividend may lawfully be paid.  When a dividend is paid - either in cash or by way of a credit to a shareholder' loan account - the debit goes to retained profits.

Hope this helps.

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Replying to Justin Bryant:
By adamblack
13th Dec 2013 14:07

That helps thank you.  

That helps thank you.  

In order to transfer funds from the P&L account to retained earnings do you just do a standard double entry between the accounts?

I can't see a retained earnings account in the software its not on the TB or Balance sheet but the accountant we use always puts the accounts together using IRIS so he could have forgot to update our software..

 

 

Thanks for your help

 

KR

 

Adam

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Replying to Justin Bryant:
By adamblack
13th Dec 2013 14:21

Hi John

We've made profit after tax but our P&L account has a debit balance and I can't therefore transfer this as a credit balance to retained earnings do you have any advice on what the issue could be? we use sage on software.

 

KR

Adam

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By johngroganjga
13th Dec 2013 14:19

Yes that is the double entry.

"Retained earnings" may be called "profit and loss account" on the balance sheet.  "Retained earnings" is not the technical legal phrase, but sums up what it is. It will be somewhere below share capital.  The note that it is cross-referenced to will show the movements during the year.

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By johngroganjga
13th Dec 2013 14:30

Your "therefore" doesn't make

Your "therefore" doesn't make sense.  The fact that your retained earnings are in debit can't be the reason why your system will not allow you to make the necessary entry.  I can't speak for Sage, because I don't use it, but I would have thought any system worth its salt would  automatically transfer each year's result to retained earnings as part of the year end roll-forward procedures.  You shouldn't have to put through a journal entry as it should be automatic.  

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By stevie
13th Dec 2013 15:11

Sage year end procedure transfers all P&L balances to P&L Reserves (normally account 3200 I think). You can tell what year you are in in Sage by looking at account activity - see what dates are displayed if you filter by current year. Or run a trial balance report - you can normally only run it for the current year. Look at Sage help if you want to know how to do the year end.

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