Dividends are distributions paid to a corporation's shareholders. Return on investment and the company's track record of paying dividends helps a corporation attract investors. Many companies issue cash dividends to shareholders, but a company can issue other assets like property to serve as dividends to shareholders, as explained by the Cliffs Notes website. The first entry concerning dividends occurs when the board of directors authorizes the issue of a dividend. The date when the dividend is declared must appear in the entry. A debit to the company's "retained earnings" account must appear in the general journal followed by a credit entry to "dividends payable." The company must record another dividend entry in the general journal to record the payment of dividends to shareholders.
1. Record the date of the dividend payment in the general journal. The date must be when the company actually pays dividends to the company's shareholders. Indicate the exact month and day. There is no need to input the year unless that is the company's preferred method of entering dates in the general journal.
2. Debit the "dividends payable" account. Debiting the "dividends payable" account indicates a reduction in a liability account. Dividends payable means the company has an obligation to pay dividends to the company's shareholders after dividends are declared. The amount of the debit should match the amount credited to the "dividends payable" account when dividends were originally declared, but not paid by the corporation.
3. Write a credit entry for "cash." Crediting cash illustrates a decrease in cash from the corporation. Furthermore, a credit to cash shows that dividends were paid to shareholders in the form of cash. Issuing cash dividends reduces an asset account, which means paying dividends reduces a shareholder's equity in the business.
Items you will need
- General journal