Dividends represent payments made from a corporation to the company’s shareholders. The company’s dividend account is a temporary account that the company closes out to prepare the general ledger for the next accounting period, as explained by the Harper College website. Closing the company’s dividend account resets the balance back to zero. Closing the dividend account makes it easier for a company to track changes in dividends paid to shareholders from year to year, as explained by the Cliffs Notes website.
1. Write the date when the closing entry is recorded in the general journal. Enter the day and month when the company closes the dividend account for the period.
2. Debit the retained earnings account for the amount of dividends issued for the period. For example, a company that issued $50,000 dividends for the period must debit retained earnings for $50,000. This entry illustrates a decrease in retained earnings for the period, which decreases shareholders’ equity.
3. Credit the dividend account for the amount of dividends paid during the period. The credit to dividends must equal the debit to retained earnings. For instance, a company that issues $50,000 dividends for a period must credit dividends for $50,000. This entry closes out the dividend account and creates a zero balance.