Dividends refer to payments a corporation makes to shareholders of the business. A corporation may issue stock, property and cash dividends to shareholders. A company cannot issue a cash dividend unless the company has sufficient cash to cover the dividend payment. A corporation’s board of directors has the responsibility of authorizing dividend payments to shareholders.
The dividends account appears in the stockholders’ equity section of a corporation’s balance sheet. When a company pays dividends to shareholders, the dividend payment reduces the amount of equity shareholders have in the company. The date when dividends are declared, the date of record and the date of payment are the three most important dates when it comes to dividends, as explained by the CliffsNotes website. The only time dividends affect a corporation’s cash flow is when the dividend gets paid out.
Declaring a dividend does not have an impact on a corporation’s cash flow. However, declaring a dividend creates a liability for the company because the dividend declaration means the company has an obligation to pay its shareholders. When a company declares a dividend, the company must journalize the declaration in the general journal. The company must debit retained earnings and credit dividends payable for the amount of the dividend payment. For example, a company that authorizes a $500,000 dividend payment must debit retained earnings for $500,000 and credit dividends payable for $500,000. This means the company has an obligation to pay its shareholders $500,000. Notice the company’s cash account is not affected when dividends are declared.
Date of Record
The date of record does not affect the company’s cash flow. The dividend date of record establishes the number of shareholders who will receive a dividend payment from the company. For example, the date of record may indicate that 1,000,000 common shareholders will receive a dividend payment from the company. The company does not have to record an entry in the general journal regarding the dividend date of record. A shareholder who purchases shares of a company after the date of record will not receive a dividend payment from the company. Only shareholders who own stock in the business as of the date of record will receive a dividend payment.
The date when dividends are issued to shareholders affects the company’s cash flow. For example, a company that declares a $500,000 dividend payment has to pay $500,000 to its shareholders. To illustrate the transaction, the company must record a $500,000 debit to dividends payable and a $500,000 credit to the company’s cash account. This journal entry indicates the company has reduces its cash account by $500,000 to cover the dividend obligation to shareholders.