Dividends in Profit & Loss - accounting community forum (2024)

Hi Pete

The basic reason is that directors' salaries are an expenses of the business and effect the tax bill whereas dividends are a distribution of available profits after tax to shareholders, ie not an expense.

In your case one person can be both a director and a shareholder but their roles are completely separate.

As a distribution of profits dividends come out of the profit pot shown on the balance sheet, ie the retained undrawn profits brought forward at the start of the year, plus any profits made so far this year.

So if a company had £10,000 undrawn profits at the start of the year and had made £1,000 of profits after tax so far this year, they might want to pay a dividend of £11,000 but it would be wrong (and look silly) to show it as a reduction of this year's profit on the P&L.

Best answer

Hi Pete,

I would suggest speaking with an accountant to understand the reasoning that remunerations are included on the P&L and why Dividends are not.

Directors remuneration is not a default nominal account within Clear Books, so how this was created will also determine how this is represented in regards to the P&L or Balance sheet.

OK thanks, looks like that was set up by my previous accountant.

However there is a clear books default account salaries which is in P & L, and also a default dividends, which isn't, it shows as SOCE.

Are you able to tell me the reasoning (and what is SOCE?)

I see.

The salaries/remunerations account is considered a company expense and as such featured on the P&L. Whereas the Dividends account is considered as an Equity account, therefore, being featured on the Balance Sheet.

SOCE = Statement of Changes in Equity.

Hi Pete

The basic reason is that directors' salaries are an expenses of the business and effect the tax bill whereas dividends are a distribution of available profits after tax to shareholders, ie not an expense.

In your case one person can be both a director and a shareholder but their roles are completely separate.

As a distribution of profits dividends come out of the profit pot shown on the balance sheet, ie the retained undrawn profits brought forward at the start of the year, plus any profits made so far this year.

So if a company had £10,000 undrawn profits at the start of the year and had made £1,000 of profits after tax so far this year, they might want to pay a dividend of £11,000 but it would be wrong (and look silly) to show it as a reduction of this year's profit on the P&L.

Best answer