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DIVIDENDS: Declaration, Payment, Journal Entries

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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