Dividends are distributions made from a company to the shareholders of the business. A company can issue cash, property or stock dividends to shareholders. Dividends appear the balance sheet and reduce the amount of equity shareholders have in the business. A formal entry in the general journal is required to record the declaration date and date of dividend payment.
A dividend declaration is made by a company’s board of directors. The board members determine the amount of the dividend payment and the number of shares that receive a dividend payment. For instance, the board can authorize a dividend payment to preferred shareholders , instead of common shareholders. When the board of directors declares a dividend payment, the date of the dividend declaration must appear in the general journal.
A liability is created when the board authorizes a dividend payment to shareholders. The company must debit the retained earnings account to indicate a decrease in retained earnings. This reflects a reduction in the company’s shareholders’ equity account. A credit must be entered into the dividends payable account, which indicates the company has an obligation to pay dividends to the company’s shareholders.
When a company pays dividends to shareholders, it reduces an asset and reduces a liability. The company must debit the dividends payable account to illustrate a decrease in the obligation to pay shareholders. The amount of the debit must equal the value of the asset provided to shareholders of the business. For instance, if a corporation pays a $100,000 cash dividend, then the company must debit dividends payable for $100,000 and credit cash for $100,000.
A corporation does not have to record a formal journal entry for the date of record. The date of record establishes who owns the stock. The dividend payment goes to the shareholder who owns the stock as of the date of record. This means a shareholder may sell shares after the date of record and still receive a dividend payment, even if the shares are sold prior to the actual dividend payment.