Is this Journal Entry to offset a shareholder loan with a dividend correct?

Hi there toddmag,

I'm going to leave the answer in this case up to our accountant users here in community. Recording dividends in both QuickBooks Online and QuickBooks Desktop (I see you've chosen both in your tagging) requires some workarounds and accounting methods. For that reason, it's best to consult an accountant to determine how to record these kinds of transactions and ensure what you're doing is correct.

To connect with an accountant familiar with QuickBooks Desktop, check out our Find a ProAdvisor page and use your postal code to search for accountants who know the program.

Thanks for being a part of the QuickBooks family! :) Have a great day.

Thanks for your reply. I removed the QB Online tag if this helps. I'm simply looking to know if the journal entries I made are correct, given my circumstances.

Regards

Todd

You're welcome, Todd. Knowing you're using QuickBooks Desktop may help in this case with what others suggest. I know you're hoping to learn if what you've come up with is correct, which still requires an accountant's eye. Hopefully someone will chime in shortly.

The first part looks correct - effectively moving what the business owes you to Dividends Paid. The second entry is NOT correct and is unnecessary. Once you have cleared the Shareholder Loan, the debt to you is Paid (the business no longer owes you that money). This does not affect Retained Earnings until the next fiscal year when QB automatically closes the financial records for the previous year.

Thanks. I wasn't sure if Dividends Payable was the same as a dividend being PAID and I didn't want it sitting in 'payable' and not being cleared.  However, because the company has already effectively paid me this amount because it's given me more money than I personally spent in expenses, I didn't want it sitting as a loan to me and instead wanted it reported as personal income. So based on this, your advice still stands?

It does - provided that the Dividends account is an Equity type account. Each time you move funds from the Shareholder Loan account to the Dividends account, the business owes you less and the Equity in your business increases.

An easier way to move funds between accounts is to use the Transfer Funds function in the Banking menu.

Thanks again. The way I presently have my accounts setup is:

Dividends Payable: Current Liabilities

Loan From Shareholder: Currently Liability

Are you saying I have the accounts setup incorrectly?

To be clear, I report a Dividend when I owe the business money, as in I've personally collected more revenue than I've personally paid in expenses. 

I never used to mix the business and personal accounts but this is a new business using the same GST number. I have to make the vast majority of purchases for Inventory, COGS, Equipment, etc using my personal credit card. Because of this and because many of my sales are POS I've kept the revenue (personally) and recorded it against the Shareholder Loan TO the business. So if and when I get to the point where I've collected more than I've paid out (loaned the business), instead of treating it as a loan from the company to me I record it as a dividend at the end of the period.  I'm not planning to continue like this but I have to clean up the books and get organized to move forward.

UPDATED: Fyi, I just created an Equity account (type: Owner's Equity) called Dividends Paid and re-tried the Journal Entry and on the Balance Sheet it records a negative Dividends Paid under Equity and the Retained Earnings also INCREASED accordingly. So this is the correct way?

Please check with your own professional accountant.

As far as I am aware, Dividends is Equity - not a Liability. Bear in mind - using Dividends is not mandatory.  It is an alternate way for business owners to pay themselves without paying a wage through payroll.  No taxes are withheld at the time of the payment, but as this is Income to you (not the business), it will be assessed on your personal income tax return. Taking periodic Dividends  draws down the equity in the business.  If you do not write yourself a check, the Dividends remain in your business as Equity. 

Regarding the Shareholder Loan account:  I set this account up for all my clients as a Bank type account and name it Due To or From Shareholder. This makes it easy to track what the owner purchased with personal funds for the business (Due to) and to track any personal purchases made with business funds (Due From).

In my opinion, there is no reason to move funds from a shareholder account to Dividends. But as I said, you should check with an accountant.

I'm in the process for looking for a new accountant so in the meantime trying to fix up on my own. I may be wrong but I thought the Dividends Payable (Liability) was a default account in QB and/or I was going off some past info I found in the community.

Yes, I'm aware and the point was to pay myself with Dividends instead of Salary and then have to deal with the payroll installments, etc.

I very much appreciate your time and consideration with this! My final question is, are you saying that you don't believe I even need to create/ use a Dividends account for this? I was just looking for a way to clear any outstanding loans "to" me from the company so I can get the negative Shareholder Loan balance down to zero or whatnot at the end of the period.

I don't know if the Dividends account is automatically created by QB. It may be included in the COA if you choose to let QB create your COA for a specific type of business. Either way,using it is not mandatory and the account can be deleted before it is used in any transactions. Pretty sure, though, that it is NOT a Liability account.

And yes, while there is no harm in moving your shareholder loan (what the business owes you) to a Dividends account, it is unnecessary. Especially since you say that your Dividends account is a Liability account. You are just shuffling funds from one liability to different liability.

Ok, thanks. For the time being I'll follow your earlier advice and keep the new equity account (type: owner's equity) that I called Dividends Paid (instead of the previous Dividends Payable (liability) until I know for sure. On the surface it appears it's doing what I need it to by reducing the liabilities, clearing the shareholder loan, and increasing retained earnings.

Cheers!

It seems that you are taking Retained Earnings too literally.You should not make manual adjustments to the Retained Earnings account. At your fiscal yearend, QB automatically closes the books for the year and adjusts your Retained Earnings account. You are now ready to start a new fiscal year. 

By rolling your shareholder loan into retained earnings, you are actually affecting the financial statements for the Previous Fiscal year.

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impossible stated:  'QB automatically closes the books for the year and adjusts your Retained Earnings account'

 

The only 'automatic' part is that it rolls the Net Income into Retained Earnings.  However, Dividends is a separate line in the Equity portion of the financial statement, and does not automatically get rolled into Retained Earnings.  It will stay there forever if you don't adjust it into Retained Earnings with an adjusting journal entry.

 

If you want to show only the dividends that were paid out in a particular financial year on that year's Balance Sheet, then at some point during the year you have to make an entry to CR Dividends and DR Retained Earnings for last year's dividends.  Then the Dividends becomes part of the Retained Earnings from previous years and only your current year Dividends will show up on the balance sheet as a negative number in the equity section of  the BS.

 

I agree that you wouldn't roll your S/H Loan amount into Retained Earnings, but you definitely can roll Dividends into Retained Earnings in the year after the dividends were paid so you can start fresh for the current year.

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Thanks, Rochelley. So which of these 2 sets of Journal Entries, if either, are you're saying is correct? My confusion over this has always been how to clear the Dividends Payable so it's not just sitting there. And I was under the impression that Div Payable was a liability to the company.

Set 1

CR Loan from Shareholder $1000 (liability)

DR Dividends Payable $1000 (liability)

CR Dividends Payable $1000 (liability)

DR Retained Earnings $1000 (equity)

Set 2

CR Loan from Shareholder $1000 (liability)

DR Dividends Paid $1000 (equity)

CR Dividends Paid $1000 (equity)

DR Retained Earnings $1000 (equity)

I avoid the 'Dividends Payable', and only post to the Dividends equity account when a dividend has actually been paid.  'Dividends Payable' as @impossible mentioned, is only another liability account and you're just shuffling money between liability accounts (if you're moving it from S/H Loan).  The original entry for paid dividends is:

DR Dividends (equity)

CR Bank (or S/H Loan if you have a positive S/H Loan and are tracking through that account)

All Dividends paid in this manner are going to show up on your Balance Sheet as a (-) number, underneath Retained Earnings in the year in which you paid them.

Next year, you will take the previous year's Dividend amount and make the following adjustment:

DR Retained Earnings

CR Dividends (equity)

Of course QB will warn you that you're posting to Retained Earnings and that you're going to wreck everything, but don't worry.  As long as this is the only manual transaction you make to Retained Earnings, you're good. :smileyhappy:

You can make this entry any time in the next fiscal year.  Then at the end of next fiscal year, the only dividends showing on your balance sheet will be Dividends paid in that fiscal year.

Ok, great, thanks! So I guess my main issue messing me up in the past was having Dividends set up as a current liability account instead of an equity account.

I have a different but similar question about a past payroll installment payment I made to the CRA. I'm asking here because I imagine it's somewhat similar. My version of QB doesn't have payroll because I'm not paying myself a salary; however, my past accountant did have me on a salary for a year so I'm entering those previous transactions.

I presently have a liability account named Payroll Installments. Right now I have a negative balance in this account sitting under liabilities. Is it correct to leave it there or does it too need to get cleared and, if so, how, please? The Journal Entry I made was:

CR Chequing $1000

DR Payroll Installments $1000

Btw, I just picked up on something...

You wrote:

"DR Dividends (equity)

CR Bank (or S/H Loan if you have a positive S/H Loan and are tracking through that account)"

My Shareholder Loan balance under liabilities was a NEGATIVE, not positive. It's negative because I ended up owing the company, ie it paid me more than I spent and collected, so instead of keeping this balance as a loan to me I'm recording it as a dividend and claiming as personal income.  As such, I'm not certain what to ask, but what is your feedback on how I set this up and did the transaction?

My mistake, @todmag , you are correct.  You would have a negative shareholder balance and apply dividends to that account to bring it to zero.

Hello there! 

I'm not an accountant, but I might be able to help.
A loan repayment is not income. You do not want to record repayments as dividends unless they are money that the corporation has loaned to you and that you are not going to pay back. In that case, you would claim that amount as income. 
If interest is charged on the loan, then the interest would be deemed income. This means that for accounting purposes, the interest is treated as income, but not the loan principle. 

For your journal entry, simply move the funds from the bank account to the loan account and you're all set.