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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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.
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.
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.
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.