(Nepean, ON, Canada)
How do I record dividends received on a corporate investment?
I operate a corporation in Ottawa. I invested in a business, not related at all to mine, and I receive dividends.
I borrowed $50,000 for the shares. I booked the loan as follows:
Credited to Long Term Loan (liability account); and
Debited to an account called Shares (asset account) I made. (I'm not 100% if it's suppose to be an asset or equity account.)
Hopefully this is right, for the sake of my question ! ha ha ha
We received our first dividend cheque, so I debited the bank account, and credit what?
I'm assuming its an account called something like dividend received, but is this an equity account, retained earnings or what exactly?
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Thanks for the donation. I think everyone should donate too! :0)
You were right to create an asset account for your shares. I would probably use a more descriptive name such as Investment in xxx where xxx is the name of the company.
Equity would only apply if shareholders invested in your corporation. In this instance, your company invested in another company, so it is an asset to the company.
When you receive your dividend, the company is receiving income on their investment ... you are creating equity in your corporation. That means you would credit a revenue account called Investment Income or Dividend Income.
When you receive a dividend from your investment you would Debit Cash in Bank and Credit Dividend Income.
I'm going to chat a bit about corporate dividends to help you become clear about when dividends are classified as an equity account. Okay, here we go ...
An investment dividend is NOT the same as when YOUR company pays a dividend to its shareholder(s).
When that event occurs, you would debit Retained Earnings-Dividends (an equity account) and credit Dividends Payable ... when the Board declares the payment
. This event should also be recorded in your Corporate Minute Book
When the dividend is paid to the company's shareholder(s), you would Debit Dividends Payable and credit Cash in Bank.
A final point to remember is that because dividends are paid out of retained earnings, you can only declare dividends if there is equity in the corporation ... dividends cannot create negative retained earnings. This is because you are essentially removing equity from the corporation when you pay dividends to its shareholder(s).
Does this help you understand the difference ... and why one type of dividend reduces equity and the other increases equity through the income received?