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Retained earnings increases with each year's dividend

I have inherited a Quickbooks file in which each year's dividend is paid to the sole director as: Dividends (equity a/c) Dr DCA Cr. My problem is that, while the director can draw on his DCA and "take out" his dividend payments, the Dividends a/c increases every year and Retained Earnings also increases and in no way represents the equity in the company. Any advice would be appreciated. (I apologise if this question appears more than once: I have had problems finding it in my Proformative account.)

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Here was my answer to the previous posting....

First, (pardon my naivete) what does the acronym DCA mean? Second, the only way that your Equity will still be overstated is if this DCA account is set up as an Equity account on Quickbooks. In essence you are decreasing (by dividend debit) equity and then increasing it again (by DCA Cr.).

Here are the usual/normal entries....

Declaration
DR Dividends
CR Dividends Payable << liability account

Payment
DR Dividends Payable
CR Cash

OR

Single Transaction
CR Cash
DR Dividends

Depending on the nature of DCA (which I think should be a liability account), make sure that the DCA is a LIABILITY account and NOT as equity on your Quickbooks setup. If you like, check the SETTINGS of each account that you think affects the numbers.
Or print out a balance sheet and see what sections the accounts appear.

With limited info, that is my initial diagnosis. ...and I reserve the right to be wrong......LOL

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

My advice is find a good accountant to unravel your books; better yet an audit (forensic) may be in order.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Wayne, I will just send him the bill! Half a day's work sounds good LOL...JK Anon

John Kimani
Title: finance manager
Company: dimkes sacco
(finance manager, dimkes sacco) |

when dividends are paid from retained earnings .the following are the entries
dr.retained earnings
cr dividends
when it paid to the director
dr dividend a/c
cr cash/bank

in essence equity is not affected anywhere since the earnings are retained after dividends are proposed and set aside

archie dsouza
Title: director
Company: cooperative bank
(director, cooperative bank) |

I agree with John on the accounting aspect. Retained earnings get reduced to the extent that dividend is set aside for distribution. Equity remains unchanged.

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

I'm somewhat confused by the above two answers. The proposed journal entries look correct, but to say that equity is not affected or remains unchanged is incorrect. When the dividend is declared retained earnings or a contra account to retained earnings called Dividends Declared is debited. Therefore retained earnings, a component of stockholders' equity, is reduced by the amount of the dividend declaration.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

The entry they are proposing is essentially the original poster's problem (well, at least that is my suspect). The entry (declaration) only affects the RE portion....basically the debit and credit cancels each other....ergo no effect.

Anonymous
(VP Development) |

Guys - thank you for all of your comments, even the acerbic ones!

Summary of my failure of understanding: my previous accountants didn't post dividends to retained earnings at the end of each year. I now understand why, and what to do before creating company annual accounts.

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