6.6: Cash Dividends
Cash dividends are corporate earnings that are paid out to stockholders. They are pay payouts of retained earnings, which is accumulated profit. Therefore, cash dividends reduce both the Retained Earnings and Cash account balances.
Cash Dividends is a contra stockholders’ equity account that temporarily substitutes for a debit to the Retained Earnings account. At the end of the accounting period, Cash Dividends is closed to Retained Earnings .
There are three prerequisites to paying a cash dividend: a decision by the Board of Directions, sufficient cash, and sufficient retained earnings.
Cash dividends are only paid on shares outstanding. No dividends are paid on treasury stock, or the corporation would essentially be paying itself.
Three dates are associated with a cash dividend. The
date of declaration
is the date the corporation commits to paying the stockholders. On that date, a liability is incurred and the
Cash Dividends Payable
is used to record the amount owed to the stockholders until the cash is actually paid. The
date of record
is the date on which ownership is determined. Since shares of stock may be traded, the corporation names a specific date, and whoever owns the shares on that date will receive the dividend. There is no journal entry on the date of record. Finally, the
date of payment
is the date the cash is actually paid out to stockholders.
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Declared a cash dividend of $2 per share on 10,000 shares of preferred stock outstanding (total $20,000) and $.50 per share on 24,000 shares of common stock outstanding (total $12,000). NOTE: The $20,000 for preferred and $12,000 for common dividends can be combined into one journal entry.
Account Debit Credit ▲ Cash Dividends 32,000 (10,000 x $2) + (24,000 x $.50) ▲ Cash Dividends Payable 32,000 ▲ Cash Dividends is a contra stockholders’ equity account that is increasing .
▲ Cash Dividends Payable is a liability account that is increasing .
- Date of Record - no journal entry
-
Paid the amount that had been declared. The Cash Dividends Payable account balance is set to zero.
Account Debit Credit ▼ Cash Dividends Payable 32,000 (10,000 x $2) + (24,000 x $.50) ▼ Cash 32,000 ▼ Cash Dividends Payable is a liability account that is decreasing .
▼ Cash is an asset account that is decreasing .
For example, if a company issued 30,000 shares of common stock, reacquired 10,000 as treasury stock, and then sold 1,000 shares of the Treasury Stock, there would be 21,000 shares outstanding (30,000 - 10,000 + 1,000). If a cash dividend of $2 per share were declared, the total cash dividends would be $42,000 (21,000 x $2).Many times the challenge with dividend declarations is to first determine the number of shares outstanding.