Replies to This Discussion

Permalink Reply by Cassandra Scott on December 8, 2011 at 20:31

What about CR Directors Loan (liability), DR Dividends Paid (equity)

When cash is available, CR Bank (asset), DR directors Loan.

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Permalink Reply by Catherine (Xero) on December 23, 2011 at 0:42

We're just working on a little step-by-step guide for this to go into our Help Centre. You may have figured out how you want to do this by now but here are the accounts we suggest you create:

Dividend Declared (Expense)

Dividend Payable (Current liability)

(Adding an account to the Chart of Accounts)

If you want to show the dividend separately on the Profit & Loss you can customise the report layout to move the Dividend Declared account under Non-operating Expenses.

(Change report layout)

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Permalink Reply by Kerry on December 24, 2011 at 17:49

Many thanks

 

I have worked it all out now

you may also need Dividends Paid as well as an account

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Permalink Reply by Cassandra Scott on January 18, 2012 at 4:32

Hi Catherine

Happy to stand corrected here, but my understanding is that if a dividend is paid by a company to a shareholder, then it is not an expense transaction, but rather reflected against equity.

A dividend to stockholders or shareholders involves two entries.  The first entry occurs on the date that the board of directors declares the dividend. In this entry the account Retained Earnings is debited and Dividends Payable is credited for the amount of the dividend that will be paid. Retained Earnings is a stockholders’ equity account and Dividends Payable is a current liability account. Some corporations debit a temporary account Dividends instead of debiting Retained Earnings. Then at the end of the year, the Dividends account is closed to Retained Earnings. 

The second entry occurs on the date of the payment to the stockholders. On that date the current liability account Dividends Payable is debited and the asset account Cash is credited.

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Permalink Reply by Catherine (Xero) on January 19, 2012 at 2:14

Hi Cassandra - you definitely know accounting better than I do! We encourage you guys with this knowledge to help each other out - I can suggest how to do certain things in Xero but don't always fully appreciate the scenario and what different options might be appropriate for the business, that is for the business and their accountant to work out - thanks for jumping in!

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Permalink Reply by Matthew Gertner on February 7, 2012 at 15:52

Hi Catherine,

Can you explain how to debit one account and credit another when neither of the accounts are bank accounts? For example, I guess I need to deduct the dividend amount from retained earnings and add it to the new dividend payable account but I can't see any way to do that.

Also it would be really helpful to have a short explanation of what the final balance sheet should look like? Will retained earnings be reduced by the amount of the dividend? Or will there be a separate liability on the balance sheet?

I'm a computer programmer not an accountant so unlike other posters in this thread, it's the accounting aspects that are making my head spin. Any guidance would be much appreciated.

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Permalink Reply by Cassandra Scott on February 7, 2012 at 22:24

Matthew

The transaction were you debit one account, and credit another, is called a Manual Journal or General Journal.

From memory, you need to have financial adviser status to action this transaction in Xero.  Its available as an option under "Adviser"

Your retained earnings should not be impacted.  As identified above, there should be a "Dividends Paid" equity account (DR).  Depending on whether the dividend is actually paid, or held for a future payment, the CR would be against either the Bank Account (or which ever account the payment is being made from), or CR Dividends Payable (or possibly loan accounts, depending on how your chart of accounts is established)

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Permalink Reply by Matthew Gertner on February 8, 2012 at 10:32

Cassandra,

Thanks a lot for the clarification. I had no clue that Manual Journal section existed. Now, as they say, I know just enough to be dangerous. :-)

My goal is to have a balance sheet that makes sense, not necessarily that meets any accounting norms, since we have an external accountant who keeps the actual books according to Czech law. So I solved this simply by paying into the (new) Dividends Paid equity account from our bank account on the date the dividend was paid. In addition, we have to pay 15% tax at the end of the month, so I created a journal entry that credits Income Tax Payable and debits Dividends Paid.

So now I see the whole dividend payment (including tax) as negative equity under Dividends Paid, the payment as a debit to our bank account and the tax as a current liability under Income Tax Payable. When we pay the tax at the end of the month I guess we will debit our bank account and credit Income Tax Payable.

I also gather that at the end of the year we will credit the Dividends Paid account to zero it out and debit that amount from Retained Earnings.

Hope I got this right! If anyone sees a problem with doing it this way, I'd appreciate your feedback.

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Permalink Reply by Mary Moore on March 16, 2012 at 20:49

Hi Matthew

Just a word of warning re journal entries....Xero is SO user friendly that lots of users are processing transactions without fully understanding the impact of them.  Please involve an accountant or bookkeeper for transactions which aren't 'run of the mill' otherwise your accounts may not make sense :-) 

And Xero people - how about encouraging new clients who buy Xero 'off the shelf' to get someone to set it up for them?  And ensuring accounting partners are doing some training with their clients when they 'sell' Xero to them (doesn't always happen).  Prevention is better than cure as they say.

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Permalink Reply by Catherine (Xero) on March 16, 2012 at 21:09

Hi Mary - we certainly do encourage this where and when we can and at certain trigger points during the setup process. However it's a balancing act because we want to be an approachable accounting system, one business owners aren't afraid of so we do want to give them the option of using Xero themselves as well. That's such a good point regarding accountants training their clients - seeing as we're really encouraging collaboration there should be a common understanding when it comes to the advisor guiding how they want their client to use Xero.

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Permalink Reply by Mary Moore on March 17, 2012 at 20:28

Hi I absolutely agree about business owners using it themselves, but if the accounts aren't setup in the correct way at the start and the conversion balances brought in correctly there is a danger that items are treated incorrectly which can lead to GST being incorrect and/or a lot of recoding needing to be done at end of year...which is time consuming (and expensive if it's being done as part of the end of year accounts).  I'm sure most Xero partners could tell some entertaining stories on this basis :-)

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Permalink Reply by Catherine (Xero) on March 17, 2012 at 21:08

This is one of the reasons we introduced the set up wizard, which we didn't have for the first year or so, as a way to encourage people to investigate and get the right data in at conversion date and one of the steps even puts the 'invite your accountant' suggestion up front. Now we're getting some feedback this process too daunting and many give up part way through - interested if you guys can think of a middle ground?

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