Dividends are the profits a company distributes to its shareholders. A company's board of directors is responsible for authorizing dividend distributions to shareholders. Paying dividends reduces the equity of a company’s shareholders. At the end of the accounting period, a company must close its dividend account because it is a temporary account. This allows the company to begin the next accounting cycle with a zero balance in the dividend account.
1. Record the dividend closing entry in the general journal. Write the day and month of the closing entry. The date must reflect the day when the company closed its dividends account for the accounting cycle.
2. Debit the company’s retained earnings account for the applicable amount. The amount of the retained earnings debit equals the amount of dividends issued by the company during the period. For instance, a company that issues dividends of $25,000 during a quarter must debit retained earnings for $25,000. The $25,000 debit indicates a reduction in the company’s retained earnings account, which decreases stockholders’ equity.
3. Credit the company’s dividend account for the amount of dividends issued during the quarter. A company that pays $25,000 in dividends must credit dividends for $25,000. This entry closes the dividends account for the quarter, which allows the company to begin the next accounting cycle with a zero balance in the dividends account.
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