Journal entry for dividend received from subsidiary

Introduction

In accounting, the profit that our subsidiary generates which increases its net worth or net assets will be recognized as an increase in our investment in that subsidiary. Likewise, when we receive the dividend from the subsidiary, we need to make the journal entry for the dividend received as a reduction in the investment in subsidiary account instead.

This is due to the dividend that we receive from the subsidiary represents the decrease of the subsidiary’s net assets. Of course, the net worth or the net assets here comes from the total assets minus total liabilities

Likewise, when the subsidiary generates profit, the retained earnings will increase resulting in the increase of the net assets. And then when it makes the dividend payment which comes from the retained earnings, its net assets will decrease as a result.

As the subsidiary is the company under our control in which we usually have more than 50% shares of ownership that we have invested in, decreasing its net assets mean the decrease of our investment. Of course, this decrease comes with the increase of cash account in our company as the individual, so it’s not a bad decrease.

Journal entry for dividend received from subsidiary

We can make the journal entry for the dividend received from the subsidiary by debiting the cash account and crediting the investment in subsidiary account.

In this journal entry, investment in subsidiary account is an investment asset account on the balance sheet, in which its normal balance is on the debit side. Likewise, this journal entry for the dividend received from the subsidiary will reduce the balance of the investment that we have in the subsidiary by the amount of the dividend received.

Dividend received from subsidiary example

For example, we, as a group company, have several subsidiary companies under our control as well as many investments in other companies. And on January 15, we receive a $10,000 cash dividend from one of our subsidiary companies.

In this case, we can make the journal entry for the $10,000 cash dividend received from the subsidiary on January 15, by debiting this $10,000 amount into the cash account and crediting the same amount into the investment in subsidiary account.

This journal entry for the dividend receceived will reduce the balance of the investment in subsidiary account on the balance sheet by $10,000 as of January 15.

No investment in subsidiary for the consolidated financial statements

As mentioned, we usually have a subsidiary company when we invest more than 50% of shares of ownership in the investee company. Likewise, we usually need to make consolidated financial statements that include all the assets and liabilities of our subsidiaries.

In this case, when we prepare the consolidated financial statements, we need to eliminate all the intercompany transactions. And this elimination includes the ownership interest of the parent company (which is us) in subsidiaries.

And this ownership interest in the subsidiary is the amount that we record as the investment in subsidiary account in our company as an individual.

Likewise, the journal entry above is for the parent company as the individual company, not as the group company. After all, there is no investment in subsidiary account in the group company as it will be eliminated when we prepare the consolidated financial statements for the group.