Entrepreneurship & Small Business

Pay yourself dividends bookkeeping question.

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  • Mar 16th, 2008 11:21 pm
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Newbie
Feb 12, 2008
5 posts
Calgary

Pay yourself dividends bookkeeping question.

Hi all,

I have an incorporated company and plan on withdrawing money throughout the year as needed. To handle the bookkeeping side of things, I just want to make sure the following procedures would be good enough.

1. during the year, when withdrawing money, CR Bank Cash, DE Due from director,
2. at year end, for dividend declaration, DE R/E deficit, CR Dividend Declared
3. at year end, for dividend pay, DE Dividend Declared, CR Due from director

Basically only 2 and 3 will be done in one step for year end and 1 will be the ongoing throughout the year.

Thanks.
31 replies
Newbie
Feb 16, 2008
17 posts
I would say those are good choices. But you might want to ask someone more professional about this manner. Such as a business lawyer or something.


Cheers
Member
User avatar
Jan 22, 2008
271 posts
14 upvotes
Burlington
Your choice of entries will work to pay dividends.

The first step is to record the reduction of cash and the increase in payments to the director. The due to and due from account should only be a temporary account to accumulate the flow of funds to directors.

Your year end entries are appropriate.

I am an accountant and you are welcome to ask me accounting questions directly (I don't charge for questions!).
Deal Addict
Aug 28, 2007
1786 posts
212 upvotes
Calgary
I can't confirm specific bookeeping double entry debits/credits but I use the dividend method of removing money from my company.

I draw the money out in a completely ad hoc fashion as needed throughout the year. Random amounts on random dates. I just record dates and amounts in a file. So crediting "Cash" and debiting the "amount due from director" makes sense

At year end, the expenses which were paid out of my pocket all year are subtracted off the top of all payments made to me. The remainder would the the amount of dividend declared on the T5. This equates to step 2. You don't specifically mention debiting the expense entries but I'm sure that's what you have implied. Each of those entries would credit the "due from director" account. Your step 2 moves the money over from retained earnings ready to be paid out.

Your step 3 makes the payment to the director as a dividend which is where his/her taxable income will be derived.

Your choices make sense to me. Maybe an RFDer more familiar with accounting can confirm your specific account names, and give a more educated opinion.
Deal Addict
Aug 28, 2007
1786 posts
212 upvotes
Calgary
Oops. I type too slow and TopTaxGuy gave you a quicker (and better) answer while I was typing.
Newbie
Feb 27, 2006
73 posts
1 upvote
iowao wrote:
Feb 20th, 2008 12:50 am
Hi all,

I have an incorporated company and plan on withdrawing money throughout the year as needed. To handle the bookkeeping side of things, I just want to make sure the following procedures would be good enough.

1. during the year, when withdrawing money, CR Bank Cash, DE Due from director,
2. at year end, for dividend declaration, DE R/E deficit, CR Dividend Declared
3. at year end, for dividend pay, DE Dividend Declared, CR Due from director

Basically only 2 and 3 will be done in one step for year end and 1 will be the ongoing throughout the year.

Thanks.
Can someone explain what CR, DE, DE R/E deficit mean?
Deal Addict
Aug 28, 2007
1786 posts
212 upvotes
Calgary
CR = credit
DE = debit

They're from double entry bookeeping

R/E = retained earnings; the accumulated amount of the net income remaining in a corporation after all dividends are paid out.

Unless it's a hobby for you, let your accountant worry about all those things... put your effort into building your business.
[OP]
Newbie
Feb 12, 2008
5 posts
Calgary
Thanks all for your valuable input and it clears up a lot for me. The example I mentioned only covers if I withdraw money out through dividend. I just learned that incorporation fee cannot be claimed as expense for your income statement, do you know how I can claim back from the company?
Deal Addict
Aug 28, 2007
1786 posts
212 upvotes
Calgary
I claim my incorporation costs when I started my companies. I can't see why it wouldn't be deductible, but maybe I'm missing something??
Deal Addict
Aug 28, 2007
1786 posts
212 upvotes
Calgary
During the year, I don't actually think about how money will be distributed at tax time. It only comes out of the company as money into my pocket. Just keep receipts for everything. End of story.

Every nickel I spend is potentially a business expense. So at the end of every month I go through my receipts and put them in two piles. I decide if it goes in the "business" pile or the "personal" pile. The accountant gets one pile and the other pile eventually gets thrown out.
[OP]
Newbie
Feb 12, 2008
5 posts
Calgary
Looking at the GIFI guide, the incorporation costs is under code 2018 which is a balance sheet account under asset. Isn's that implies it cannot be claimed? it does not make sense to me too because I would have thought that this is a business expense.
[OP]
Newbie
Feb 12, 2008
5 posts
Calgary
The following is what I can get from the T2 guide, apparently it seems you have to file schedule 10 along with it as well just for the incorporation cost.

Schedule 10, Cumulative Eligible Capital
Deduction
Complete Schedule 10 to calculate the cumulative eligible
capital deduction.
Some business-related expenditures are capital in nature.
Corporations incur these expenditures, called eligible
capital expenditures, to buy intangible capital property,
known as eligible capital property. Some examples of
eligible capital property are:
■ goodwill;
■ trademarks;
■ franchises, concessions, or licences for an unlimited
period; and
■ patents, and licences to use patents for an unlimited
period, that you elect not to include in Class 44. For more
information on Class 44, see the CCA rates and classes
chart on page 38.
Expenses you incur for incorporation, reorganization, or
amalgamation also qualify as eligible capital expenditures.
Eligible capital expenditures are not deductible in full, and
they are not eligible for CCA. However, they may qualify
for a partial deduction called a cumulative eligible cap......
Sr. Member
Aug 3, 2005
677 posts
3 upvotes
Incorporation costs are capitalized as Eligible Capital property and on Schedule 10 are amortized 20% per year but then prorated for the first year, although some accountants dont prorate it.
Sr. Member
Dec 27, 2007
644 posts
4 upvotes
Why are you paying out dividends? I assume that it's because the company is not profitable (enough).

An alternative is to let the shareholder advance sit as a loan for a year. You will have to pick up the loan as income if it is not repaid within one year, etc.

consult your friendly local accountant for the details....
Deal Addict
Aug 28, 2007
1786 posts
212 upvotes
Calgary
bythehour wrote:
Feb 21st, 2008 11:17 pm
Why are you paying out dividends? I assume that it's because the company is not profitable (enough).

An alternative is to let the shareholder advance sit as a loan for a year. You will have to pick up the loan as income if it is not repaid within one year, etc.

consult your friendly local accountant for the details....
That sounds intriguing but I don't quite follow your process. Would you please elaborate? My companies are profitable and I need to get the money out of them to spend on my non-deductible purchases (i.e. to have a life). The only options I know are as dividends to the shareholder (me) or as salary to the employee (also me).

Who is loaning money to whom? This money is not invested or otherwise used for gainful business activities of any kind but rather the mundane daily expenses of living a sinful life. So I can't understand how the company could loan the money to me when I wouldn't be able to pay it back. Alternatively, I can't see me loaning money to the company because that wouldn't leave me with the unencumbered cash to fritter away??

Or do you mean the company loans me the money for a year, so I could defer personal tax for one year provided I pay it back to avoid having to declare it as income?? Where would I get the revenue to make that payback... other than from my corporation? I would need to have ever larger loans just to defer personal tax for one year.
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