{"id":333,"date":"2024-09-06T16:48:47","date_gmt":"2024-09-06T16:48:47","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/dividends\/"},"modified":"2024-09-11T19:52:41","modified_gmt":"2024-09-11T19:52:41","slug":"dividends","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/dividends\/","title":{"raw":"Dividends","rendered":"Dividends"},"content":{"raw":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\r\n<ul>\r\n \t<li>Define dividends and how they are declared and distributed<\/li>\r\n \t<li>Account for the declaration and payment of dividends<\/li>\r\n<\/ul>\r\n<\/section>&nbsp;\r\n\r\nCash dividends are corporate earnings paid out to stockholders. They are payouts of <strong>retained earnings<\/strong>, which is accumulated profit. Therefore, cash dividends reduce both the Retained Earnings and Cash account balances.\r\n\r\nThere are three prerequisites to paying a cash dividend: a decision by the board of directors, sufficient cash, and sufficient retained earnings.\r\n\r\nFour dates are associated with a cash dividend.\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04000445\/time-273857_1920.jpg\"><img class=\"size-medium wp-image-5109 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04000445\/time-273857_1920-300x200.jpg\" alt=\"A calendar with a date circled in red.\" width=\"300\" height=\"200\" \/><\/a>\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">The <strong>declaration date<\/strong> is also referred to as the <em>announcement date<\/em> since a company notifies shareholders and the rest of the market. The declaration date is the date on which a company officially commits to the payment of a dividend. 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.<\/li>\r\n \t<li style=\"font-weight: 400;\">The <strong>ex-dividend<\/strong> date, or ex-date, is the date on which a stock begins trading without the dividend. To receive the declared dividend, shareholders must own the stock prior to the ex-dividend date.<\/li>\r\n \t<li style=\"font-weight: 400;\">The <strong>record date<\/strong> usually occurs three business days after the ex-dividend date and is the date on which a company officially determines the shareholders of record, those who owned the stock prior to the ex-dividend date and who are eligible to receive the dividend payment. There is no journal entry on the date of record.<\/li>\r\n \t<li style=\"font-weight: 400;\">The <strong>payment date<\/strong> for a stock's dividend is the day on which the actual checks go out\u2014or electronic payments are made\u2014to eligible shareholders. Shareholders owning the stock on the record date will receive the dividend on the payment date.<\/li>\r\n<\/ul>\r\nCash dividends are only paid on shares outstanding. No dividends are paid on treasury stock, or the corporation would essentially be paying itself.\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04001044\/junction-984045_1920.jpg\"><img class=\"size-medium wp-image-5110 alignleft\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04001044\/junction-984045_1920-300x168.jpg\" alt=\"An aerial view of the downtown district of a city.\" width=\"300\" height=\"168\" \/><\/a>\r\n\r\nA company may issue a dividend payment to shareholders made in shares rather than as cash. The stock dividend has the advantage of rewarding shareholders without reducing the company's cash balance.\r\n\r\nThese stock distributions are generally made as fractions paid per existing share. For example, a company might issue a 10% stock dividend, which would require it to issue 1 share for every 100 shares outstanding.\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n<section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25224[\/ohm2_question]<\/section>\r\n<h2>Entries for Cash Dividends<\/h2>\r\nWhen a dividend is declared by the board of directors, the company will credit dividends payable and debit an owner\u2019s equity account called Dividends or perhaps Cash Dividends.\r\n\r\nCash Dividends is a contra stockholders\u2019 equity account that temporarily substitutes for a debit to the Retained Earnings account. Just like owner withdrawals are closed to owner\u2019s equity in a sole proprietorship at the end of the accounting period, Cash Dividends is closed to Retained Earnings.\r\n\r\nFor example, assume the Board of Directors of Tanya Corp. met on December 10, 20X1 and declared a cash dividend of $.50 per share on 24,000 shares of common stock outstanding (total $12,000) to owners on the date of record of December 31, 20X1, payable on January 20, 20X2.\r\n\r\n<section class=\"textbox example\" aria-label=\"Example\">\r\n<h3>Note<\/h3>\r\nThe business days prior to the date of record (December 31, in this case) the stock will be trading \u201cex-dividend\u201d which means the actual date that owners will be eligible for the dividend is 3 business days prior to the date of record.\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\">Journal<span style=\"float: right;\">Page XX<\/span><\/caption>\r\n<thead>\r\n<tr>\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20X1<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 10<\/th>\r\n<td>Cash Dividends<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">12,000.000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 10<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Cash Dividends Payable<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">12,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 10<\/span><\/th>\r\n<td>To record declaration of cash dividend of $0.50 on common stock<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIn January, when the payment is made, the journal entry would be:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\">Journal<span style=\"float: right;\">Page XX<\/span><\/caption>\r\n<thead>\r\n<tr>\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20X2<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Jan 20<\/th>\r\n<td>Cash Dividends Payable<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">12,000.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Jan 20<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">12,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Jan 20<\/span><\/th>\r\n<td>To record payment of December 10, 20X1 dividend declared<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/section>When cash dividends are declared, if there is any preferred stock outstanding, the dividends have to be applied to the preferred stock first. We\u2019ll tackle that in the next section after you check your understanding of accounting for cash dividends in general.\r\n\r\n<section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25225[\/ohm2_question]<\/section>","rendered":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\n<ul>\n<li>Define dividends and how they are declared and distributed<\/li>\n<li>Account for the declaration and payment of dividends<\/li>\n<\/ul>\n<\/section>\n<p>&nbsp;<\/p>\n<p>Cash dividends are corporate earnings paid out to stockholders. They are payouts of <strong>retained earnings<\/strong>, which is accumulated profit. Therefore, cash dividends reduce both the Retained Earnings and Cash account balances.<\/p>\n<p>There are three prerequisites to paying a cash dividend: a decision by the board of directors, sufficient cash, and sufficient retained earnings.<\/p>\n<p>Four dates are associated with a cash dividend.<\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04000445\/time-273857_1920.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-5109 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04000445\/time-273857_1920-300x200.jpg\" alt=\"A calendar with a date circled in red.\" width=\"300\" height=\"200\" \/><\/a><\/p>\n<ul>\n<li style=\"font-weight: 400;\">The <strong>declaration date<\/strong> is also referred to as the <em>announcement date<\/em> since a company notifies shareholders and the rest of the market. The declaration date is the date on which a company officially commits to the payment of a dividend. 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.<\/li>\n<li style=\"font-weight: 400;\">The <strong>ex-dividend<\/strong> date, or ex-date, is the date on which a stock begins trading without the dividend. To receive the declared dividend, shareholders must own the stock prior to the ex-dividend date.<\/li>\n<li style=\"font-weight: 400;\">The <strong>record date<\/strong> usually occurs three business days after the ex-dividend date and is the date on which a company officially determines the shareholders of record, those who owned the stock prior to the ex-dividend date and who are eligible to receive the dividend payment. There is no journal entry on the date of record.<\/li>\n<li style=\"font-weight: 400;\">The <strong>payment date<\/strong> for a stock&#8217;s dividend is the day on which the actual checks go out\u2014or electronic payments are made\u2014to eligible shareholders. Shareholders owning the stock on the record date will receive the dividend on the payment date.<\/li>\n<\/ul>\n<p>Cash dividends are only paid on shares outstanding. No dividends are paid on treasury stock, or the corporation would essentially be paying itself.<\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04001044\/junction-984045_1920.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-5110 alignleft\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04001044\/junction-984045_1920-300x168.jpg\" alt=\"An aerial view of the downtown district of a city.\" width=\"300\" height=\"168\" \/><\/a><\/p>\n<p>A company may issue a dividend payment to shareholders made in shares rather than as cash. The stock dividend has the advantage of rewarding shareholders without reducing the company&#8217;s cash balance.<\/p>\n<p>These stock distributions are generally made as fractions paid per existing share. For example, a company might issue a 10% stock dividend, which would require it to issue 1 share for every 100 shares outstanding.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<section class=\"textbox tryIt\" aria-label=\"Try It\"><iframe loading=\"lazy\" id=\"ohm25224\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=25224&theme=lumen&iframe_resize_id=ohm25224&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><\/section>\n<h2>Entries for Cash Dividends<\/h2>\n<p>When a dividend is declared by the board of directors, the company will credit dividends payable and debit an owner\u2019s equity account called Dividends or perhaps Cash Dividends.<\/p>\n<p>Cash Dividends is a contra stockholders\u2019 equity account that temporarily substitutes for a debit to the Retained Earnings account. Just like owner withdrawals are closed to owner\u2019s equity in a sole proprietorship at the end of the accounting period, Cash Dividends is closed to Retained Earnings.<\/p>\n<p>For example, assume the Board of Directors of Tanya Corp. met on December 10, 20X1 and declared a cash dividend of $.50 per share on 24,000 shares of common stock outstanding (total $12,000) to owners on the date of record of December 31, 20X1, payable on January 20, 20X2.<\/p>\n<section class=\"textbox example\" aria-label=\"Example\">\n<h3>Note<\/h3>\n<p>The business days prior to the date of record (December 31, in this case) the stock will be trading \u201cex-dividend\u201d which means the actual date that owners will be eligible for the dividend is 3 business days prior to the date of record.<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\">Journal<span style=\"float: right;\">Page XX<\/span><\/caption>\n<thead>\n<tr>\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20X1<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 10<\/th>\n<td>Cash Dividends<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">12,000.000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 10<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Cash Dividends Payable<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">12,000.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 10<\/span><\/th>\n<td>To record declaration of cash dividend of $0.50 on common stock<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>In January, when the payment is made, the journal entry would be:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\">Journal<span style=\"float: right;\">Page XX<\/span><\/caption>\n<thead>\n<tr>\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20X2<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Jan 20<\/th>\n<td>Cash Dividends Payable<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">12,000.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Jan 20<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">12,000.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Jan 20<\/span><\/th>\n<td>To record payment of December 10, 20X1 dividend declared<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/section>\n<p>When cash dividends are declared, if there is any preferred stock outstanding, the dividends have to be applied to the preferred stock first. We\u2019ll tackle that in the next section after you check your understanding of accounting for cash dividends in general.<\/p>\n<section class=\"textbox tryIt\" aria-label=\"Try It\"><iframe loading=\"lazy\" id=\"ohm25225\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=25225&theme=lumen&iframe_resize_id=ohm25225&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><\/section>\n","protected":false},"author":6,"menu_order":12,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Dividends\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"\",\"author\":\"Bastian Wiedenhaupt\",\"organization\":\"\",\"url\":\"https:\/\/pixabay.com\/photos\/time-calendar-saturday-weekend-day-273857\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"https:\/\/pixabay.com\/service\/terms\/#license\"},{\"type\":\"cc\",\"description\":\"\",\"author\":\"Free-Photos\",\"organization\":\"\",\"url\":\"https:\/\/pixabay.com\/photos\/junction-city-aerial-view-urban-984045\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"https:\/\/pixabay.com\/service\/terms\/#license\"}]","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"part":321,"module-header":"- Select Header -","content_attributions":[{"type":"original","description":"Dividends","author":"Joseph Cooke","organization":"Lumen Learning","url":"","project":"","license":"cc-by","license_terms":""},{"type":"cc","description":"","author":"Bastian Wiedenhaupt","organization":"","url":"https:\/\/pixabay.com\/photos\/time-calendar-saturday-weekend-day-273857\/","project":"","license":"cc0","license_terms":"https:\/\/pixabay.com\/service\/terms\/#license"},{"type":"cc","description":"","author":"Free-Photos","organization":"","url":"https:\/\/pixabay.com\/photos\/junction-city-aerial-view-urban-984045\/","project":"","license":"cc0","license_terms":"https:\/\/pixabay.com\/service\/terms\/#license"}],"internal_book_links":[],"video_content":null,"cc_video_embed_content":{"cc_scripts":"","media_targets":[]},"try_it_collection":null,"_links":{"self":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/333"}],"collection":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/users\/6"}],"version-history":[{"count":3,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/333\/revisions"}],"predecessor-version":[{"id":954,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/333\/revisions\/954"}],"part":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/parts\/321"}],"metadata":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/333\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/media?parent=333"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=333"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/contributor?post=333"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/license?post=333"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}