A dividend is a disbursement paid to shareholders of a corporation. Dividends may be paid to a shareholder in the form of stock, cash or property. A corporation's board of directors decides when to declare dividends and the price per share that each shareholder receives. A company must have enough cash and money reinvested in the business before the board of directors can declare a cash dividend. Declaring a dividend creates a liability for a corporation, meaning the company has an obligation to pay its shareholders as of the date of dividend declaration.
Enter the month and day when the board of directors authorizes the dividend. Declaring dividends does not mean the company is paying on that particular day. When a corporation declares dividends it sets the stage for making dividend payments to shareholders at a later date, usually within the same month of declaration.
Debit the retained earnings account for the applicable amount. Let's assume a company issued a $.50 per share dividend on 150,000 shares. Multiply $.50 times 150,000 shares, which equals $75,000. In this scenario, debit the retained earnings for $75,000, since this is the amount decreased from shareholders' equity.
Credit the dividends payable account. This illustrates an increase in liability, since the company has an obligation to pay its shareholders when the board authorizes dividends. If a company debits retained earnings for $75,000, the credit to dividends payable must be $75,000, since debits and credits must always equal.
Items you will need
- General Journal