Table of Contents
What is a Dividend?
A dividend is a distribution of a portion of a company’s earnings, decided by its board of directors, to a class of its shareholders. Dividends can be issued in various forms, such as cash payments, stocks or other securities. The board of directors determines the amount of the dividend, and the company must declare a dividend before it can be paid.
Dividends are typically paid out of a company’s profits, and are therefore considered a way for the company to distribute its profits to shareholders. Dividends are often paid on a regular basis, such as quarterly or annually, but a company may also choose to pay special dividends in addition to its regular dividends.
Dividends are typically paid to shareholders of common stock, although they can also be paid to shareholders of preferred stock. Shareholders are typically entitled to receive dividends in proportion to the number of shares they own.
Journal Entries for Dividends
Journal entry for declaring a dividend
To record the declaration of a dividend, you will need to make a journal entry that includes a debit to retained earnings and a credit to dividends payable. This entry is made at the time the dividend is declared by the company’s board of directors. The amount credited to the Dividends Payable account represents the company’s obligation to pay the dividend to shareholders. The debit to Retained Earnings represents a reduction in the company’s equity, as the company is distributing a portion of its profits to shareholders.
Example: On January 1, 202X, ABC Corporation had 500,000 common shares outstanding. On July 1, 202X, ABC Corporation declared a dividend of $2.00 per common share, which was paid on July 15, 202X.
On July 1, 202X, the company should record the declaration of the dividend by debiting Retained Earnings for $1,000,000 (500,000 shares * $2.00 per share) and crediting Dividends Payable for $1,000,000.
| Account | ||
|---|---|---|
| Retained earnings | $1,000,000 | |
| Dividends payable | $1,000,000 |
Journal entry for payment of a dividend
To record the payment of a dividend, you would need to debit the Dividends Payable account and credit the Cash account. When the dividend is paid, the company’s obligation is extinguished, and the Cash account is decreased by the amount of the dividend.
Example: On January 1, 202X, ABC Corporation had 500,000 common shares outstanding. On July 1, 202X, ABC Corporation declared a dividend of $2.00 per common share, which was paid on July 15, 202X.
On July 15, 202X, when the dividend is paid, the company should debit Dividends Payable for $1,000,000 and credit Cash for $1,000,000.
| Account | ||
|---|---|---|
| Dividends payable | $1,000,000 | |
| Cash | $1,000,000 |
