Investment Dividends

by Ava
(Nepean, ON, Canada)

How do I record dividends received on a corporate investment?

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?

Thank you so much for your help !!! Your site is awesome !!

I donated !! Everyone should :)

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Hi Ava,

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?

Comments for Investment Dividends

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Oct 24, 2011
Thanks !!!!
by: AVA

This sounds great ! I understand it much better. It does make more sense to rename the account not just shares, as its not very detailed. Thank you, I changed it to Investment from XXX.

Just to get it a little more clear, its debit bank (asset) and credit dividend income (equity)? This is for when you receive money from a investment.

When you declare dividends from your company to your own shareholders its different. It's debit Retained Earnings Dividends (an equity account) and credit Dividends Payable (liability account).

When the dividend is paid to the company's shareholders, you would Debit Dividends Payable (liability account) and credit Cash in Bank (asset).

I feel much better, I have never done dividends before and the accountant is hard to get a hold of, perhaps we should switch to someone else.

Thank you soooo much, don't know what I would do without your site :D

Oct 25, 2011
by: Anonymous

So the Dividend income account is asset or equity account when I receive the dividend cheque?

Thank you sooooo much !!! Just getting back into bookkeeping, it has been 6 years. So I am a little rusty!

Oct 26, 2011
Review Your Chart of Accounts
by: Lake

Hi Anonymous,

Go back and read what I said in the main post. I gave the entry to record the dividend cheque and the type of account it gets booked to.

It is easy to get confused so I'm going to give you two references to review:

Chart of Accounts

Cheat Table

Reviewing both of these chats will help refresh your memory.

Oct 26, 2011
Response to Ava
by: Lake

Hi Ava,

The entry is:

Debit Cash in Bank (a current asset account on your Balance Sheet)

Credit Dividend Income (an income account on your Income Statement)

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