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How to Model Dividends

Dividend Expense is typically modeled as a reduction to Retained Earnings which in turn causes a net use of cash which will be funded automatically by the funding options manager. 

For integrity reasons, FinanceSeer forces the ending balance on Retained Earnings to be calculated based on the movement schedule, where the "default" movement in Retained Earnings equals the root account from the Income Statement.

Opening Retained Earnings            100

+ Sum of User Defined Movements   0 

+ Root IS Account                          30

= Closing Retained Earnings           130

That being the case, there are two typical approaches to modeling dividends in FinanceSeer. 

Via the Income Statement Hierarchy

Normally, most people decide to call the root Income Statement account Net Income or Net Profit, but if you want to also model dividends Expense, it might be useful to call the root Income Statement account "Retained Earnings for the Period".  This enables you to include Net Income as the second to last subtotal. 

Profit before tax

- Tax Expense

= Net Income

- Dividends Expense

= Retained Earnings for the Period

For reporting purposes, you can stop reporting at Net Income, but for modeling purposes, you can easily see what is being contributed to Retained Earnings.

Via a Balance Sheet Movement

Another approach for modeling dividends is to create a movement called Dividends.  This movement can be defined as a "subtractive" movement, so it always lowers the balance. 

This approach is nice when you also have other balance sheet accounts that have dividends (such as Equity Earnings). 

 In this case, a dividends movement applied to an equity account will be a "use" of cash, while a dividends movement applied to an asset will be a "source" of cash.  In either case, the funding options manager will take care of the other side of the transaction. 

 

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