JournaldrillCash dividend
A cash dividend is recorded on the declaration date by debiting Dividends (or Retained Earnings directly) and crediting Dividends Payable for shares outstanding times the dividend per share. No entry is made on the record date. On the payment date, debit Dividends Payable and credit Cash.
Syntax
Declaration: Dr Dividends / Cr Dividends Payable; Record date: no entry; Payment: Dr Dividends Payable / Cr Cash| Part | What it is |
|---|---|
Dividends | Temporary equity account closed to Retained Earnings at year end; some companies debit Retained Earnings directly. |
Dividends Payable | Current liability from declaration until payment. |
Shares outstanding | Issued shares minus treasury shares; treasury shares get no dividend. |
Preferred dividends | Paid first at the stated rate; cumulative preferred dividends in arrears must be paid before common. |
Examples
Dr Dividends 25,000 / Cr Dividends Payable 25,000Result: Equity down 25,000, liabilities up 25,000
0.50 per share declared on 50,000 shares outstanding.
Dr Dividends Payable 25,000 / Cr Cash 25,000Result: Liability cleared, cash down 25,000
Paid four weeks later on the payment date.
Dr Dividends 8,000 / Cr Dividends Payable 8,000Result: Preferred dividend for the year
1,000 shares of 100 par, 8% preferred: 100,000 x 8% = 8,000, paid before any common dividend.
Common mistakes
- Recording an expense for dividends: dividends are a distribution of earnings and never appear on the income statement.
- Making an entry on the record date: the record date only fixes who receives the dividend.
- Paying dividends on treasury shares: compute the dividend on shares outstanding, not shares issued.
Practice Cash dividend
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- Declaring a cash dividendWestfield Grocers Inc. has 120,000 shares of common stock issued, of which 5,000 are held as treasury stock. The board declares a cash dividend of $0.40 per share, payable next month. Record the declaration.
- Dividends declared and paidThe board of Granite Peak Outfitters, Inc. declares a cash dividend of $4,500 to its stockholders and pays it the same day. The company records dividends in a Dividends account.
Questions
What is the journal entry for a dividend declared?
Debit Dividends (or Retained Earnings) and credit Dividends Payable for the total amount declared.
Does a dividend reduce retained earnings?
Yes. Whether debited directly or through the Dividends account that is closed at year end, retained earnings fall by the amount declared.
What are dividends in arrears?
Unpaid dividends on cumulative preferred stock. They are not a liability until declared but must be disclosed and paid before common dividends.
Related
- Owner withdrawal and dividendsHow to record an owner drawing cash (Dr Owner's Drawing, Cr Cash) and a corporation declaring and paying dividends (Dr Dividends, Cr Dividends Payable).
- Stock dividendHow to record a stock dividend: small (under 20 to 25%) at market value, large at par, using Common Stock Dividend Distributable. Compared with a split.
- Retained earningsWhat retained earnings are, how net income and dividends change them, the closing entries that post to the account, the formula and what a deficit means.
- Issuing stockHow to record a stock issue: Dr Cash, Cr Common Stock at par and Cr Paid-in Capital in Excess of Par. No-par shares, preferred stock and stock for assets.