How to record a dividend by creating journal entries

This article explains how to create journal sets to record a dividend in FreeAgent.

If you’re a limited company shareholder, the company may declare a dividend that isn’t going to be paid out of the company’s bank account immediately. In this situation, you will need to create journal entries to record the dividend in your FreeAgent accounts, and show the money the company owes you in respect of that dividend as part of your director’s loan account. This is also known as creating a set of dividend journals.

If you don’t want to use the director’s loan account, please ask your accountant where they would recommend you post these entries.

How to create a set of dividend journals

To create a set of dividend journals, follow these steps:

1. Navigate to ‘Journal entries'

Navigate to the ‘Accounting’ tab at top of the screen and select ‘Journal Entries’ from the drop-down menu.

Screenshot showing the 'Accounting' menu with 'Journal Entries' highlighted

2. Add new journal entries

Select the ‘Add New Journal Entries’ button on the ‘Journal entries' page.

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If you can’t see this button, you will need to ask your accountant (or the person who set up your FreeAgent account) to give you access to creating journal entries.

3. Enter the details of the journal set

Enter a description to identify what the journal entries relate to and choose the relevant date which the dividend was declared. This is important not only for the company accounts, but because dividends form part of your own personal income and must be declared on your Self Assessment tax return for the correct tax year.

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4. Completing the first line of the journal set

In the first line of the journal set, choose the code ‘908 - Dividend’ from the ‘Code’ drop-down menu. Next, select the user to whom the dividend was paid from the ‘User’ drop-down menu.

If your company has more than one shareholder, you’ll need to create each shareholder’s dividend individually by completing a pair of journal entries for each shareholder. Anyone who receives dividends should be set up as either a shareholder, employee or director in the Users area of FreeAgent.

You can also enter ‘Additional information’ for each entry in the fields provided if you wish.

Finally, enter the amount of the dividend that was declared for this user in the ‘Debit’ field.

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5. Completing the second line of the journal set

In the second line of the journal set, choose the code ‘907 - Director’s loan account’ from the ‘Code’ drop-down menu. Select the same user as you did for the dividend entry in the first line of the journal set.

You can also enter ‘Additional information’ for each entry in the fields provided if you wish.

Finally, enter the same dividend amount in the ‘Credit’ field.

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6. Balance the journal sets

The debit and credit sides of the journal set must balance, which means that there must be the same amount on each side of the journal set. When the journal set balances, you will see a difference of £0.00 displayed in green beneath the journal entries.

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If the journal set does not balance, you’ll see a negative figure displayed in red beneath the journal entries. You won’t be able to complete the entry until the journal set balances.

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7. Select ‘Create New Journal’

When you’re happy with everything you’ve entered and your journal set balances, select ‘Create New Journal’.

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If you’re the only shareholder in the company, there’s nothing more for you to do. However, if more than one shareholder is being paid a dividend, you’ll need to select ‘Add new journal entries’ from the ‘Journal entries’ area and follow these steps again. Remember to select the right user name and enter the correct amount for each journal set you create.

Explaining the dividend payment

Navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop-down menu.

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Choose the relevant bank account from the list of accounts.

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Select the transaction, choose 'Money Paid to User' as the 'Type' and 'Payment from Director Loan Account' as the 'Category'.

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Select 'Explain Transaction' to complete the process.

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