Problem
We code our dividends paid to the shareholders to an 'Equity' account, so that they don't appear as 'Other Expense' in the P&L report. We then need to journal the dividend to Retained Earnings at the start of the next financial year to clear out the account.
This process, then causes issues in the Statement of Cash Flow report as the movement in the Dividends Paid and Retained Earnings account overstate/understate the Net Increase/Decrease for the period and the Cash at the End of the period is therefore out of balance!
Solution
A linked account for dividends paid in Equity, so that it balances into Retained Earnings when reports are run and the year is closed.
Alternative Solution
Modify the chart of accounts so that codes for things such as dividends can be processed and not appear in the P&L, but be accounted for when looking at Retained Earnings. This would also be useful to have income tax expense appear seperate to 'Other Expenses' with a Profit before income tax and Profit after income tax subtotal in the P&L.
"Linked Account for Dividends Paid"
