Dividends are paid from net profit after tax, so don't feature in the calculation of net profit. Even if you pay the dividend(s) through the director loan account, you'll need to set up a nominal for dividends.
Thank you very much for your reply Figurate.
However, please could you tell me how to roughly calculate the net profit after tax figure.
When I used to pay dividends through the Dividends Paid ledger, I used to do the following:
Take the net profit figure from the Sage PNL
Add the dividends back on to that figure
Calculate 20% of this figure to get the Corporation Tax figure.
Then take the Corp tax figure off the net profit figure on the Sage PNL.
This would help me roughly estimate what my net profit after tax would be before I gave my books to my accountant.
The problem I'm having is that when I used to pay dididends through the Dividends Paid ledger, the amounts used to automatically come off the net profit in Sage as I went along. However, now (as advised) I'm paying them through the Directors Loan ledger, these payments don't seem to deduct from the net profit figure? Moreover, I don't understand where payments through the Directors Loan account deduct from in Sage?
As such, I'm worried that my profit looks inflated because my dividend payments (paid through the Directors Loan ledger) haven't been deducting from profits like they used to when I paid them through the Dividends Paid ledger.
Is there a calculation I can do to roughly estimate the net profit after tax figure, somehow factoring in the dividend payments (paid through the Directors Loan ledger)?
Sorry if I am not being very clear but I find it difficult to explain. 2013 will definitely be the year that I attend a bookkeeping course!
Thanks again for your help
James
Hi, Are you now just putting the dividend into sage by a bank transfer from the current account, say, to the director's loan account*? In which case, to get an indication of "net profit after corporation tax" from the Sage P&L, you just have to take 20% for corporation tax off the net profit, (this is because a dividend put into Sage by bank transfer from the current account to the DLA won't touch the P&L at all, so there's no need to adjust for it in the way you did before. That said, you'll want to make sure that you aren't taking more dividends than your reserves cover, so now you'll have to check the cummulative dividends that have gone through your DLA in Sage, and deduct the total dividends off your net profit to see the balance available to pay as dividends.
It sounds like you previously used a nominal code for dividends that was a P&L account in Sage, and there's nothing particularly wrong with this, if you know what you are doing (mainly that you have to be aware that needs to be "added back" to the Sage P&L report to get to the profit figure - which you were doing) and when the year end is run on Sage, it automatically clears down with the rest of the P&L nominal codes. it's also possible to use a nominal code for dividends that has been set up as a balance sheet code, that doesn't affect your P&L account, and the balance sheet report shows that if the dividends are covered by the cummulative reserves (not just current year profit), but it would need a manual adjustment at the year end. I've also seen people putting their dividends through their DLA as you are now being advised. Personally, I find this the least preferable method, because you then have to trawl through the DLA to pick out the dividends - unless of course, you don't have anything else in the DLA other than dividends - and it can look like an overdrawn DLA account in Sage. And at the end of the year, it still has to be manually adjusted...
Hope this makes sense, and perhaps have a word with your accountant as to why he wanted you to put your dividends through your DLA, rather than your previous method, as he will know all your circumstances.
Edit:*if the DLA is set up as a bank account.
-- Edited by Figurate on Monday 17th of December 2012 11:32:07 AM
Hi Figurate,
Thank you very very much - that makes perfect sense now. I really appreciate the time that you have taken out to answer my question.
I'll speak to my accountant and clarify why he's asked us to do it this way.
Have a great Christmas
James
