How to Account for Dividends Paid
Recognize when to record the liability of the company to pay the cash dividends., Debit the retained earnings account., Credit the dividends payable account., Record the transaction on the date of payment., See the big picture.
Step-by-Step Guide
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Step 1: Recognize when to record the liability of the company to pay the cash dividends.
This occurs on the "date of declaration," when the board of directors formally authorizes payment of dividends.
Under standard accounting procedures, expenses are recorded when they are incurred.
In this case, dividend expenses are recorded because by declaring them the company is held liable to make good on the declaration and deliver the dividend.A declaration specifies when the declaration is made, when the date of record is, and when the dividend will be paid.
The date of record specifies the date by which a shareholder must own stock in order to qualify for the dividend.
For example, imagine your company declares a cash dividend on February 1 that will be paid to shareholders on March 1 and that the date of record is set at February
15.
The liability would be recorded on February
1. -
Step 2: Debit the retained earnings account.
Debit the retained earnings account for the total amount of the dividends that will be paid out.
This will function as a decrease in this account because money that could have been retained is being paid out instead.
This entry is made on the date of declaration.
Continuing the previous example, imagine you company has 10,000 shares outstanding (total shares) and decides to issue a dividend of $0.50 per share.
Your total debit from retained earning would be the same as the total value of the dividend payout, or $5,000 ($0.50 x $10,000). , The dividends payable account recorded how much the company owes to shareholders between declaring a dividend and actually paying it.
This account will be credited (increased) on the date of declaration.
Like the debit to retained earnings, the amount credited will be the total value of the dividends declared.In our example, your company would credit dividends payable for $5,000 (the same amount as was debited from retained earnings). , The only other entry needed when issuing a cash dividend is the entry on the date on which the company actually pays the cash dividend.
Because this is a cash payment, you would credit the cash account (decreasing it) and debit the dividends payable account (decreasing it).
This is because both transactions represent money leaving the company.
Again, the value recorded will be the total value of the dividends paid.So, in our example, you would credit cash for $5,000 and also debit dividends payable for $5,000 on the date of payment, March
1. , When you declare and pay a dividend, the transaction will affect your company's balance sheet.
At the end of the account period, you'll be left with a cash account and retained earnings account that are lowered by the amount of the dividend that you paid out. -
Step 3: Credit the dividends payable account.
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Step 4: Record the transaction on the date of payment.
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Step 5: See the big picture.
Detailed Guide
This occurs on the "date of declaration," when the board of directors formally authorizes payment of dividends.
Under standard accounting procedures, expenses are recorded when they are incurred.
In this case, dividend expenses are recorded because by declaring them the company is held liable to make good on the declaration and deliver the dividend.A declaration specifies when the declaration is made, when the date of record is, and when the dividend will be paid.
The date of record specifies the date by which a shareholder must own stock in order to qualify for the dividend.
For example, imagine your company declares a cash dividend on February 1 that will be paid to shareholders on March 1 and that the date of record is set at February
15.
The liability would be recorded on February
1.
Debit the retained earnings account for the total amount of the dividends that will be paid out.
This will function as a decrease in this account because money that could have been retained is being paid out instead.
This entry is made on the date of declaration.
Continuing the previous example, imagine you company has 10,000 shares outstanding (total shares) and decides to issue a dividend of $0.50 per share.
Your total debit from retained earning would be the same as the total value of the dividend payout, or $5,000 ($0.50 x $10,000). , The dividends payable account recorded how much the company owes to shareholders between declaring a dividend and actually paying it.
This account will be credited (increased) on the date of declaration.
Like the debit to retained earnings, the amount credited will be the total value of the dividends declared.In our example, your company would credit dividends payable for $5,000 (the same amount as was debited from retained earnings). , The only other entry needed when issuing a cash dividend is the entry on the date on which the company actually pays the cash dividend.
Because this is a cash payment, you would credit the cash account (decreasing it) and debit the dividends payable account (decreasing it).
This is because both transactions represent money leaving the company.
Again, the value recorded will be the total value of the dividends paid.So, in our example, you would credit cash for $5,000 and also debit dividends payable for $5,000 on the date of payment, March
1. , When you declare and pay a dividend, the transaction will affect your company's balance sheet.
At the end of the account period, you'll be left with a cash account and retained earnings account that are lowered by the amount of the dividend that you paid out.
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Jose Cruz
Experienced content creator specializing in home improvement guides and tutorials.
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