When a company issues dividends, it needs to record the different stages of the transaction on its books. “Closing” means zeroing out temporary holding accounts, such as dividends, and transferring the amount to permanent accounts that exist from year to year. An example of a permanent account that goes from year to year is retained earnings. This act of closing is part of a larger process that includes transferring the balance from other temporary revenue and expense accounts to permanent. Accounts are closed by the bookkeeper recording journal entries or notations signifying a business transaction that took place. A journal entry is supported by documentation supporting the notation.
Double-check the amount of the dividend paid. Before you close the account, review the support regarding the dividend to ensure that the dividend amount was recorded correctly to prevent an error that would be harder to correct after the debt entry.
Debit retained earnings for the amount of the dividend paid. The retained earnings accounts are the accumulated profits of the business that have not been provided to stockholders via dividend. It is an equity account on the balance. Debit is an accounting term. If you debit an asset or an expense, you increase the value. Debiting a liability, revenue or equity account decreases the value of that account. Debiting retained earnings will decrease retained earnings by the amount of the dividend.
Credit the dividend account for the amount of the dividends paid. Credit is an accounting term. If you credit an asset or expense, you decrease its value. The dividend is meant to hold the value of the amount paid to the stockholders prior to it being deducted from retained earnings. When cash, an asset, was paid out, it needed to be decreased with a credit. To keep the books in balance, a debit had to be added to the dividend account. To close the dividend account, a credit equal to the original dividend debit must be applied.
If you are maintaining your company’s financial records, consider adopting accounting software to help you with your task.