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Investors who purchase shares after the date of record but before the payment date are not entitled to receive dividends since they did not own the stock on the date of record. The date of payment is the date that payment is issued to the investor for the amount of the dividend declared. Though, the term “cash dividends” is easier to distinguish itself from the stock dividends account which is a completely different type of dividend. A dividend is a distribution of a portion of a company’s earnings, decided by its board of directors, to a class of its shareholders. Dividends can be issued in various forms, such as cash payments, stocks or other securities. The board of directors determines the amount of the dividend, and the company must declare a dividend before it can be paid.

1. Suppose a corporation currently has 100,000 common shares outstanding with a par value of $10.
2. The treatment as a current liability is because these items represent a board-approved future outflow of cash, i.e. a future payment to shareholders.
3. Dividend is usually declared by the board of directors before it is paid out.
4. Once the previously declared cash dividends are distributed, the following entries are made on the date of payment.

With this journal entry, the statement of retained earnings for the 2019 accounting period will show a $250,000 reduction to retained earnings. However, the statement of cash flows will not show the $250,000 dividend as it has not been paid yet; hence no cash is involved here yet. To see the effects on the balance sheet, it is helpful to compare the stockholders’ equity section of the balance sheet before and after the small stock dividend. This journal entry is made to eliminate the dividends payable that the company has made at the declaration date as well as to recognize the cash outflow that is not an expense. Dividends Payable is classified as a current liability on the balance sheet, since the expense represents declared payments to shareholders that are generally fulfilled within one year.

The difference is the 3,000 additional shares of the stock dividend distribution. The company still has the same total value of assets, so its value does not change at the time a stock distribution occurs. The increase in the number of outstanding shares does not dilute the value of the shares held by the existing shareholders. The market value of the original shares plus the newly issued what is a balance sheet shares is the same as the market value of the original shares before the stock dividend. For example, assume an investor owns 200 shares with a market value of $10 each for a total market value of $2,000. A small stock dividend occurs when a stock dividend distribution is less than 25% of the total outstanding shares based on the shares outstanding prior to the dividend distribution.

Dividend journal entry

On the other hand, stock dividends distribute additional shares of stock, and because stock is part of equity and not an asset, stock dividends do not become liabilities when declared. To illustrate how these three dates relate to an actual situation, assume the board of directors of the Allen Corporation declared a cash dividend on May 5, (date of declaration). The cash dividend declared is $1.25 per share to stockholders of record on  July 1, (date of record), payable on July 10, (date of payment). Because financial transactions occur on both the date of declaration (a liability is incurred) and on the date of payment (cash is paid), journal entries record the transactions on both of these dates. The Dividends Payable account appears as a current liability on the balance sheet. To record the declaration of a dividend, you will need to make a journal entry that includes a debit to retained earnings and a credit to dividends payable.

If a financial statement date intervenes between the declaration and distribution dates, the Stock Dividend Distributable account should be disclosed as part of Paid-In Capital. Dividends declared account is a temporary contra account to retained earnings. The balance in this account will be transferred to retained earnings when the company closes the year-end account.

Hence, the company needs to account for dividends by making journal entries properly, especially when the declaration date and the payment date are in the different accounting periods. A stock split is much like a large stock dividend in that both are large enough to cause a change in the market price of the stock. Additionally, the split indicates that share value has been increasing, suggesting growth is likely to continue and result in further increase in demand and value.

A stock dividend distributes shares so that after the distribution, all stockholders have the exact same percentage of ownership that they held prior to the dividend. There are two types of stock dividends—small stock dividends and large stock dividends. The key difference is that small dividends are recorded at market value and large dividends are recorded at the stated or par value. Once the previously declared cash dividends are distributed, the following entries are made on the date of payment. The company makes journal entry on this date to eliminate the dividend payable and reduce the cash in the amount of dividends declared. However, sometimes the company does not have a dividend account such as dividends declared account.

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How to Book Dividend Declaration Journal Entry

To illustrate, assume that Duratech Corporation has 60,000 shares of $0.50 par value common stock outstanding at the end of its second year of operations. Duratech’s board of directors declares a 5% stock dividend on the last day of the year, and the market value of each share of stock on the same day was $9. Figure 14.9 shows the stockholders’ equity section of Duratech’s balance sheet just prior to the stock declaration. Instead, the company prepares a memo entry in its journal that indicates the nature of the stock split and indicates the new par value. The balance sheet will reflect the new par value and the new number of shares authorized, issued, and outstanding after the stock split. To illustrate, assume that Duratech’s board of directors declares a 4-for-1 common stock split on its $0.50 par value stock.

Dividend record date is the date that the company determines the ownership of stock with the shareholders’ record. The shareholders who own the stock on the record date will receive the dividend. Receiving the dividend from the company is one of the ways that shareholders can earn a return on their investment.

This is the date that dividend payments are prepared and sent to shareholders who owned stock on the date of record. The related journal entry is a fulfillment of the obligation established on the declaration date; it reduces the Cash Dividends Payable account (with a debit) and the Cash account (with a credit). At the time dividends are declared, the board establishes a date of record and a date of payment. The date of record establishes who is entitled to receive a dividend; stockholders who own stock on the date of record are entitled to receive a dividend even if they sell it prior to the date of payment.

Such dividends—in full or in part—must be declared by the board of directors before paid. In some states, corporations can declare preferred stock dividends only if they have retained earnings (income that has been retained in the business) at least equal to the dividend declared. The company can make the cash dividend journal entry at the declaration date by debiting the cash dividends account and crediting the dividends payable account. If the company prepares a balance sheet prior to distributing the stock dividend, the Common Stock Dividend Distributable account is reported in the equity section of the balance sheet beneath the Common Stock account.

For example, in a 2-for-1 stock split, two shares of stock are distributed for each share held by a shareholder. From a practical perspective, shareholders return the old shares and receive two shares for each share they previously owned. The new shares have half the par value of the original shares, but now the shareholder owns twice as many.

At payment date of cash dividend

Dividends are typically paid out of a company’s profits, and are therefore considered a way for the company to distribute its profits to shareholders. Dividends are often paid on a regular basis, such as quarterly or annually, but a company may also choose to pay special dividends in addition to its regular dividends. Although, the duration between dividend declared and paid is usually not long, it is still important to make the two separate journal entries. This is especially so when the two dates are in the different account period. While a few companies may use a temporary account, Dividends Declared, rather than Retained Earnings, most companies debit Retained Earnings directly.

This journal entry is to eliminate the dividend liabilities that the company has recorded on December 20, 2019, which is the declaration date of the dividend. The major factor to pay the dividend may be sufficient earnings; however, the company needs cash to pay the dividend. Although it is possible to borrow cash to pay the dividend to shareholders, boards of directors probably never want to do that.