Dividend Journal Entry
Overview
Dividend is usually declared by the board of directors before it is paid out. 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.
Receiving the dividend from the company is one of the ways that shareholders can earn a return on their investment. In this case, the company may pay dividends quarterly, semiannually, annually, or at other times (either fixed or not fixed). This is due to various factors such as earnings, cash flows, or policies.
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.
Dividend journal entry
Dividend declared journal entry
At the date the board of directors declares dividends, the company can make journal entry by debiting dividends declared account and crediting dividends payable account.
| Account | Debit | Credit |
|---|---|---|
| Dividends declared | 000 | |
| Dividends payable | 000 |
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.
However, sometimes the company does not have a dividend account such as dividends declared account. If so, it can just directly debit retained earnings. This is usually the case in which the company doesn’t want to bother keeping the general ledger of the current year dividends.
| Account | Debit | Credit |
|---|---|---|
| Retained earnings | 000 | |
| Dividends payable | 000 |
Dividend paid journal entry
On the payment date of dividends, the company needs to make the journal entry by debiting dividends payable account and crediting cash account.
| Account | Debit | Credit |
|---|---|---|
| Dividends payable | 000 | |
| Cash | 000 |
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.
Example
For example, on December 20, 2019, the board of directors of the company ABC declares to pay dividends of $0.50 per share on January 15, 2020, to the shareholders with the record date on December 31, 2019. And the company has 500,000 shares of common stock.
In this case, the dividend is $250,000 (0.50 x 500,000) and ABC can make the journal entry for dividend declared and the dividend paid below:
On December 20, 2019, the company can make dividend declared journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Dividends declared | 250,000 | |
| Dividends payable | 250,000 |
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.
On January 15, 2020, the company can make dividend paid journal entry as below
| Account | Debit | Credit |
|---|---|---|
| Dividends payable | 250,000 | |
| Cash | 250,000 |
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.
Dividend date
As we have seen in the example above, there are usually three important dates associated with dividends, including declaration date, record date, and payment date. However, we only make journal entries on the declaration date and the payment date of dividends. There is no recording on the dividend record date.
Dividend declaration date
Declaration date is the date that the board of directors declares the dividend to be paid to shareholders. It is the date that the company commits to the legal obligation of paying dividend. Hence, the company needs to make a proper journal entry for the declared dividend on this date.
Dividend record date
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. As an example above, there is no journal entry on this date.
Dividend payment date
This is the date that the dividend payment is made to the shareholders. The company makes journal entry on this date to eliminate the dividend payable and reduce the cash in the amount of dividends declared.