A post office called Dousman has been in operation since 1856. Founded in 1881, the village was named for Talbot C. Dousman, a local farmer and businessman who helped bring the Chicago and North Western railroad to the area. The village was incorporated in 1917.
The village was at one time called "Bullfrog Station" because of the numerous bullfrogs in the area. The local baseball team is still called the Dousman Frogs and an annual frog jumping competition takes place during Dousman's Derby Days.