Confusion on dividends

Londina
Londina MAAT, AAT Licensed Accountant Posts: 814
Where do you post dividends that has to be paid to the director? In the profit & loss or balance sheet?

In our studies I've always seen the dividends in the balance sheet, in the retained earnings section, something like this:
Balance at 1 Nov 2006: 12,345
Profit for the year: 7,278
Total: 19,623

Final dividend for 2006: (700)
Interim dividend for 2007: (600)
Balance at 31 Oct 2007: 18,323
but at work I have been told to post dividends in the profit & loss, doing this journal:

DR Dividends (p&l)
CR Other Creditors (bs)

Why?

Comments

  • Andy Blyth
    Andy Blyth Registered Posts: 48 ? ? ?
    Dividends paid / payable used to be shown in the P&L account, but that changed a few years back. It is now incorrect to show them in the P&L, as they are a distribution of reserves, not an expense which affects profit.

    Therefore, the correct way to account for them is:-

    Dr Profit and Loss Reserves (Retained Earnings)
    Cr Other Creditors (or Directors Loan Account if there is one)

    Remember too that it is illegal to pay dividends unless there is sufficient distributable reserves to cover it.

    Hope that helps.

    Andy
  • bumblebee
    bumblebee Registered Posts: 135 ? ? ?
    Probably they are accrued in the year,
    Dividends for the year goes to P&L, and because the amount wasnt paid in that year it will be shown as creditor in the B/S.
  • deanshepherd
    deanshepherd Registered Posts: 1,809
    Andy Blyth wrote: »
    Therefore, the correct way to account for them is:-

    Dr Profit and Loss Reserves (Retained Earnings)
    Cr Other Creditors (or Directors Loan Account if there is one)

    I wouldn't be doing that. Your P&L b/fwd is then going to be out of sync.

    From a bookkeeping perspective post it to Dividends in the P&L. When you come to prepare the statutory accounts make sure it goes in the balance sheet notes rather than on the face of the P&L.
  • Bluewednesday
    Bluewednesday Registered Posts: 1,624
    I wouldn't be doing that. Your P&L b/fwd is then going to be out of sync.

    From a bookkeeping perspective post it to Dividends in the P&L. When you come to prepare the statutory accounts make sure it goes in the balance sheet notes rather than on the face of the P&L.

    Agreed, that's how I do it! Quite a useful way to keep a check on dividends vs profit too!
  • Andy Blyth
    Andy Blyth Registered Posts: 48 ? ? ?
    I really didn't mean to post it to your opening balances. That would just be silly.

    It is a movement in reserves, not profit and loss and it is therefore incorrect to post it to P+L.

    From a bookkeeping point of view, you can post it wherever you like, but if its in the wrong place, it'll just take extra time when preparing the accounts (and extra fees if you have them prepared externally).

    It is generally accepted accounting practice that dividends don't go in the P+L.
  • Bluewednesday
    Bluewednesday Registered Posts: 1,624
    Absolutely, I'm fully aware of the accounting rules as I know Dean is, but this is just the difference between theory and practice. It is easier to see what is going on to put it in the p and l but it would never be posted there in final accounts.

    I really don't see how one journal to move it into the balance sheet would cause that much extra work at year end - or extra costs!
  • Andy Blyth
    Andy Blyth Registered Posts: 48 ? ? ?
    I'm not trying to suggest that one journal would incur lots of extra time or costs, but from experience, when bookkeepers account for one thing incorrectly, its usually a good indication that other things are going to be wrong too. That's when it would start to rack up extra time and cost.

    I think that as accountants, we should encourage bookkeepers to account for things correctly. It would be just as easy to set up a nominal code in the reserves section and post dividends there if you want to keep track of them in that way, and that would follow accepted accounting principles.

    As you say, its really not much of a concern, I'm just trying to establish the correct treatment for dividends, which is what the original question was asking.
  • Steve Collings
    Steve Collings Registered Posts: 997
    Londina,

    You might find this article I wrote of interest to you if you are working in practice as it is geared at practice accountants.

    As other posters have said dividends are not shown on the face of the P&L because of FRS 25/FRSSE requirements (though see below). Revisions to Schedules 4 and 8 of the Companies Act in 2006 were also responsible for the withdrawal of dividends from the face of the P&L, though some companies do actually disclose them, but if you do it must be in the following format:

    Profit for the year
    P&L reserves b/f
    Dividends
    P&L reserves c/f

    This can be done even though to be "strictly technically correct" you would not disclose the dividends but the wording in FRS 25 is quite confusing but for ease it's best not to put them on the face of the P&L.

    Kind regards
    Steve
  • Bluewednesday
    Bluewednesday Registered Posts: 1,624
    @Andy as long as the end result is the same - who cares of the method!
  • Andy Blyth
    Andy Blyth Registered Posts: 48 ? ? ?
    Steve, I tried to read your article, but I'm not registered on that site. I will do so. I'm looking forward to reading what you have written.

    @Bluewednesday - there are many methods, and as you say, so long as the end result is correct.
  • Steve Collings
    Steve Collings Registered Posts: 997
    Andy Blyth wrote: »
    Steve, I tried to read your article, but I'm not registered on that site. I will do so. I'm looking forward to reading what you have written.

    It's free to register on AccountingWEB. I write all their financial reporting and auditing material so I hope you find them beneficial.

    Steve
  • Londina
    Londina MAAT, AAT Licensed Accountant Posts: 814
    Thank you everybody and Steve, I will register with AccountingWEB too.
    Andy Blyth wrote: »
    It is a movement in reserves, not profit and loss and it is therefore incorrect to post it to P+L.
    It is generally accepted accounting practice that dividends don't go in the P+L.
    From a bookkeeping perspective post it to Dividends in the P&L. When you come to prepare the statutory accounts make sure it goes in the balance sheet notes rather than on the face of the P&L.

    From the various responses, I will post the dividends into the balance sheet, since if I post them into the p&l, I have to move them anyway.
  • deanshepherd
    deanshepherd Registered Posts: 1,809
    Londina wrote: »
    From the various responses, I will post the dividends into the balance sheet, since if I post them into the p&l, I have to move them anyway.

    I would wager they will get moved wherever you post them..!
  • Poodle
    Poodle Registered Posts: 711
    As one of my old accounting lecturers used to say,

    "there are many ways to skin a cat"

    but then he also said

    "what swims like a duck and looks like a duck, is a duck" ref FRS 5

    :)
  • Andy Blyth
    Andy Blyth Registered Posts: 48 ? ? ?
    Poodle wrote: »
    "what swims like a duck and looks like a duck, is a duck" ref FRS 5
    :)

    I like this. Nice simple way of explaining the concept of substance over form.
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