How to Liquidate Dividends

Liquidating dividends occur when there is not enough retained earnings to meet dividend payments.

When a company pays money out to its shareholders, it is known as a dividend. If a company pays more dividends than it has in retained earnings, the dividend is known as a liquidating dividend. Part of the dividend then comes from retained earnings and the other portion comes from an account called additional paid-in capital. Once you have the premise of what a liquidating dividend is, it is just a matter of basic accounting to report the liquidating dividend.

Things You'll Need

• General ledger

Instructions

1. Debit retained earnings by the full amount still left in the retained earnings account. Debiting retained earnings reduces the account to zero. For example, assume your company pays $30,000 in dividends and has $20,000 in retained earnings. So, you would debit the retained earnings account by $20,000.

2. Debit additional paid-in capital by the remainder of the dividend not covered by retained earnings. In the example, the amount not covered by retained earnings is $10,000, so debit additional paid-in capital by $10,000. This reduces your additional paid-in capital account by $10,000.

3. Credit dividends payable by the amount of dividends you are paying. In the example, credit dividends payable by $30,000. This increases the dividends payable account by $30,000.

Tips & Warnings

• This is one complete journal entry, so you need to make sure your debits equal your credits. If they do not, then you did something wrong.

References

• Accounting Financial Tax: Retained Earning 2 -- Property and Liquidating Dividends