The question of how to close a dividend account is important for two completely different sets of people. For accountants, closing a dividend account involves accounting entries to deal with payments to shareholders. For investors, closing a dividend account means selling off shares in a direct dividend reinvestment plan with a company and collecting the cash proceeds.
What accountants need to know
When a company declares a dividend, it has to account for the money that it plans to pay in dividends. One way to do so is to credit the Dividends Payable account for the cash that it will pay out, debiting the Retained Earnings account. Then, once the dividend is paid, the Dividends Payable account returns to zero.
However, some companies choose to use an intermediate step, debiting a temporary Dividend account to reflect the current year’s declared dividends. For companies that use this alternative method, the Dividend account gets closed out at the end of each year, with the amount effectively transferred to Retained Earnings.
The advantage of the second method is that it creates more stability in the Retained Earnings within a given year. In some cases, that makes comparisons easier to make.
What investors need to know
Some companies allow investors to open dividend reinvestment plan accounts, referred to as dividend accounts, or DRIPs for short. These accounts are held directly with the company, circumventing the need for a broker. Many Drips also allow you to make additional purchases and sales of stock, either on a one-time or a regular basis.
Closing a DRIP dividend account typically involves contacting the company that handles the dividend reinvestment plan and asking them to make provisions for the shares in the account. Most companies will allow you either to sell all your shares or to transfer them, either to another individual or to a brokerage account. Drip managers can charge a modest fee to handle a transfer, but otherwise, the transaction typically looks a lot like what you’d see from a professional broker handling a similar request.
Many investing concepts have more than one meaning, and so it’s important to know which definition you’re using in contemplating what to do. Closing a dividend account involves much different steps for accountants than for investors, but both can benefit from knowing how to close a dividend account in their own particular way.
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