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NK Designer

What is the normal balance of dividends?

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1 Answer

  1. This answer was edited.

    The normal balance of dividend is “Debit”.

    Firstly, you should know what a normal balance in accounting means.

    Normal Balances in Accounting

    Some accounts have  “Debit” Balances while the others have  “Credit” balances. The normal account balance is nothing but the expectation that the specific account is debit or credit. Few accounts increase with a “Debit” while there are other accounts, the balances of which increases while those accounts are “Credited”.

    You can have a glance over the list of accounts having a debit and credit balances normally specified below-

    ParticularsDebitCredit
    AssetsYesNo
    LiabilitiesNoYes
    Owner’s EquityNoYes
    RevenueNoYes
    ExpensesYesNo
    Dividend YesNo
    Retained EarningsNoYes

    Since you are now aware of normal balances in accounting. I will move ahead with the next concept.

    Why do dividends have a debit balance?

    Generally, the company or corporates pay dividends to its investors. It is paid out of the company’s retained earnings or free reserves and since it reduces the balance of reserves it is “Debited”. It is also recorded under financing activity under the cash flow statement.

    But one needs to note that the dividends declared are basically a temporary account i.e at the end of the reporting period the balance in the dividend account is transferred to Retained Earnings. And the dividend account is closed.

    The company also has an option to directly give effect for dividend declared in the retained earnings. Here, there is no need to prepare the dividend account.

    Conclusion

    Since dividend payments are reduction of retained earnings for an entity it has a debit balance as its reduction of share holder’s equity. As per the modern rules, we debit the decrease in the capital.

    But the company also has an option to directly record this transaction through its retained earnings and in such a case the dividend declared account is not created and so the question of it having a debit or credit balance does not arise.

    I hope this was helpful.


    Aastha Mehta.

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