When a cash dividend is declared by the board of directors, debit the Retained Earnings account and credit the Dividends Payable account, thereby reducing equity and increasing liabilities. Thus, there is an immediate decline in the equity section of the balance sheet as soon as the board of directors declares a dividend, even though no cash has yet been paid out. Show
When a dividend is later paid to shareholders, debit the Dividends Payable account and credit the Cash account, thereby reducing both cash and the offsetting liability. The net effect of these two transactions is to reduce cash and equity, which means that the entire impact of the cash dividend is contained within the balance sheet; there is no impact on the income statement, though the payment will appear as a use of cash in the financing activities section of the statement of cash flows. Example of the Accounting for Cash DividendsThe board of directors of Hostetler Corporation declares a $1 dividend for each of the company's 10,000 shares outstanding. You would record the following entry: When a corporation's board of directors declares a cash dividend to its shareholders, the balance sheet account "retained earnings" is reduced by the amount of the dividend. Since retained earnings is an equity account that comprises the cumulative balance of the company's earnings, the payment of dividends results in a reduction in the equity account. Example of a Cash Dividend
Journal Entry
Financial Statement Impact
Preferred Dividends
Cash dividends (usually referred to as dividends) are a distribution of the corporation's net income. Dividends are analogous to draws/withdrawals by the owner of a sole proprietorship. The draws and dividends are not expenses and will not appear on the income statements. Corporations routinely need cash in order to replace inventory and other assets whose costs have increased or to expand the business. As a result, corporations rarely distribute all of their net income to stockholders. Young, growing corporations may pay no dividends at all. Before a corporation can distribute cash to its stockholders, the corporation's board of directors must declare a dividend. The date the board declares the dividend is known as the declaration date and it is on this date that the liability for the dividend is created. Legally, corporations must have a credit balance in Retained Earnings in order to declare a dividend. Practically, a corporation must also have a cash balance large enough to pay the dividend and still meet upcoming needs, such as asset growth and payments on existing liabilities. To illustrate, assume that on March 15 a corporation's board of directors approves a motion to pay its regular quarterly dividend of $0.40 per share on May 1 to stockholders of record on April 15. The following entry is made on the declaration date of March 15 assuming that 2,000 shares of common stock are outstanding:  If the corporation wants to keep a separate general ledger record of the current year dividends, it could use a temporary, contra retained earnings account entitled Dividends Declared. At the end of the year, the balance in Dividends Declared will be closed to Retained Earnings. If such an account is used, the entry on the declaration date is: It is important to note that there is no entry to record the liability for dividends until the board declares them. Also, there is no entry on the record date (April 15 in this case). The record date merely determines the names of the stockholders that will receive the dividends. Dividends are paid only on outstanding shares of stock; no dividends are paid on the treasury stock. On May 1, when the dividends are paid, the following journal entry is recorded. Which of the following occurs when a cash dividend is declared?When a corporation declares a dividend, it debits its retained earnings and credits a liability account called dividend payable. On the date of payment, the company reverses the dividend payable with a debit entry and credits its cash account for the respective cash outflow.
Which items change when a company pays a cash dividend?Cash dividends affect the cash and shareholder equity on the balance sheet; retained earnings and cash are reduced by the total value of the dividend. Stock dividends have no impact on the cash position of a company and only impact the shareholders equity section of the balance sheet.
Which of the following is true when a cash dividend is declared and paid?Answer choice: 2. Retained earnings is reduced by the amount of the dividend. Explanation: When a dividend is declared retained earnings must be decreased.
When a cash dividend is declared quizlet?When the board of directors decides that a cash dividend will be paid, there are three important dates: the declaration date, the date of record, and the payment date. The dividend declaration date is the date on which the board of directors decides a dividend will be paid and announces it to shareholders.
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Which of the following would result when a company pays a previously declared cash dividend?
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