DIVIDENDS: Declaration, Payment, Journal Entries
- Graziano Stefanelli
- 4 days ago
- 2 min read
Dividends represent the distribution of earnings to shareholders. They are recorded only when declared by the board and affect equity, not profit or loss.
1. What Are Dividends?
Dividends are payments made by a corporation to its shareholders, typically from retained earnings.
They can be:
Cash dividends (most common)
Stock dividends
Property dividends
Dividends are not expenses — they reduce retained earnings and total equity.
2. Dividend Lifecycle: Three Key Dates
Date | Meaning |
Declaration Date | Board formally approves dividend — liability is recorded |
Record Date | Shareholders on record this day will receive the dividend (no entry needed) |
Payment Date | Cash is disbursed to shareholders |
3. Accounting Entries — Cash Dividends
At declaration date:
debit Retained Earnings
credit Dividends Payable
At payment date:
debit Dividends Payable
credit Cash
Example:
On June 1, the board declares a $10,000 cash dividend, payable June 15.
June 1 entry:
debit Retained Earnings ..................... 10,000
credit Dividends Payable .................... 10,000
June 15 entry:
debit Dividends Payable ...................... 10,000
credit Cash .............................................. 10,000
4. Stock Dividends
Instead of cash, the company issues additional shares to shareholders.
Small stock dividend (≤20–25% of outstanding shares):
Record at market value
Large stock dividend (>25%):
Record at par value
Entry (small dividend):
debit Retained Earnings
credit Common Stock
credit Additional Paid-in Capital
5. Property and Scrip Dividends
Property dividends: Distribute non-cash assets (e.g., securities, inventory). Record at fair value.
Scrip dividends: Promise to pay dividends in the future — a form of notes payable.
6. Dividend Policy and Restrictions
Companies may face legal or contractual limits on dividends, such as:
Minimum retained earnings
Debt covenants
Solvency tests
Some firms may also use dividend reinvestment plans (DRIPs) instead of cash.
7. Financial Statement Impact
Balance sheet: Retained earnings decrease; cash and/or equity change
Statement of changes in equity: Shows declared and paid dividends
Cash flow statement: Cash dividends appear in financing activities
8. Disclosures
Companies disclose:
Total dividends declared and paid
Dividend per share
Record and payment dates
Any restrictions on dividend payments
Key take-aways
Dividends reduce retained earnings and are recorded only when declared.
Cash dividends create a liability until paid; stock dividends increase share count.
Dividends do not impact the income statement.
Proper tracking ensures compliance with legal and contractual obligations.
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