JournaldrillOwner withdrawal and dividends
An owner withdrawal is recorded by debiting Owner's Drawing (or Withdrawals) and crediting Cash; it reduces equity and is not an expense. A corporation records a dividend when declared, debiting Dividends (or Retained Earnings) and crediting Dividends Payable, then debits Dividends Payable and credits Cash when it pays.
Syntax
Dr Owner's Drawing / Cr Cash | Dr Dividends / Cr Dividends Payable, then Dr Dividends Payable / Cr Cash| Part | What it is |
|---|---|
Owner's Drawing | Contra-equity account debited for amounts the proprietor takes; closed to Owner's Capital at year end. |
Dividends | Temporary equity account (or Retained Earnings directly) debited when a corporation declares a dividend. |
Dividends Payable | Current liability credited on the declaration date and debited when paid. |
Cash | Asset credited when the money actually leaves the business. |
Examples
Dr Owner's Drawing 2,000 / Cr Cash 2,000Result: Equity down 2,000, assets down 2,000
Proprietor takes 2,000 for personal use.
Declaration: Dr Dividends 5,000 / Cr Dividends Payable 5,000Result: Equity down 5,000, liabilities up 5,000
Board declares a 5,000 cash dividend; no cash moves yet.
Payment: Dr Dividends Payable 5,000 / Cr Cash 5,000Result: Liabilities down 5,000, assets down 5,000
Dividend paid on the payment date.
Common mistakes
- Debiting Salaries Expense for an owner draw: a proprietor's withdrawal is a distribution of equity, not a business expense, so it never reduces net income.
- Recording a dividend only when it is paid: the liability exists from the declaration date, so declare first, pay later.
- Debiting Owner's Capital directly for every draw: most systems use a separate Drawing account during the year and close it to capital at year end.
Practice Owner withdrawal and dividends
These drills check your answer on live data, free, no account needed.
- Owner withdrawalDana Price, the sole owner of Coastal Dog Grooming, withdraws $1,200 in cash from the business to pay personal bills.
- Dividends declared and paidThe board of Granite Peak Outfitters, Inc. declares a cash dividend of $4,500 to its stockholders and pays it the same day. The company records dividends in a Dividends account.
Questions
Is owner's drawing a debit or credit?
Owner's Drawing is debited when the owner takes money out. It has a debit normal balance because it reduces equity.
Are dividends an expense?
No. Dividends are a distribution of retained earnings to shareholders and appear in the statement of retained earnings, not on the income statement.
What is the entry on the dividend record date?
None. Only the declaration date and the payment date get journal entries.
Related
- Owner investmentHow to record an owner investing cash or equipment: debit the asset received, credit Owner's Capital or Common Stock. Examples and common mistakes.
- Cash dividendHow to record a cash dividend: Dr Dividends, Cr Dividends Payable on declaration; Dr Dividends Payable, Cr Cash on payment; nothing on the record date.
- Retained earningsWhat retained earnings are, how net income and dividends change them, the closing entries that post to the account, the formula and what a deficit means.
- Closing entriesHow to close the books: close revenues and expenses to Income Summary, close Income Summary to Retained Earnings, then close Dividends. Worked example.