Scrip Dividend Journal Entry
Scrip Dividend is the form of a dividend that company issues to the shareholder in the form of liability. Company issue dividend to the shareholder with the promissory note with the interest and maturity date.
A dividend is a portion of a company’s earnings that are distributed to shareholders. Company dividends are typically paid out quarterly, and the amount of the dividend is determined by the board of directors. Shareholders who own stock in the company are entitled to receive dividends, and the dividend payments can be used to reinvest in the company or to generate more income.
Dividends are an important part of investors’ portfolios, and they can provide a stable source of income. However, it is important to remember that dividends are not guaranteed, and they can fluctuate based on the performance of the company. The dividends from investment can be an excellent way to generate income, but it is important to consider them as part of a broader investment strategy.
One important factor that determines whether or not a shareholder will receive a dividend is the company’s financial stability. If the company is doing well financially, it is more likely to declare a dividend. However, if the company is struggling, it may choose to withhold dividends in order to reinvest the money back into the business.
Another important factor that affects dividends is the board of directors’ decision. The board will consider various factors, such as the company’s financial stability and performance, before deciding whether or not to declare a dividend. Sometimes, the board may also take into account current market conditions and the needs of the shareholders.
For example, if shareholders are in need of income, the board may be more likely to declare a dividend. Ultimately, whether or not a shareholder receives a dividend depends on many factors. The financial stability of the company and the decision of the board of directors are two of the most important factors. Other factors, such as market conditions and shareholder needs, can also play a role in determining whether or not a dividend will be declared.
The dividend is one of the factors to reward the shareholder. It is important to keep the investors holding the company’s shares. If many investors sell the shares at the same time, it can crash the share price. So the management teams try to make the dividend to the shareholders, it will be different from one company to another.
When the company does not have enough cash but wants to declare a dividend to the shareholder. So they decide to use the scrip dividend to pay the shareholders. It is a form of note payable that the company will make payment in the future. The company issued dividends to the shareholders, but there is no cash paid. But it is the promissory note to the shareholders.
Journal Entry for Scrip Dividend
The company will reduce the retained earnings when declaring dividends to the shareholder. But instead of cash paid, the company will record notes payable to the shareholders. It means the shareholders will become the creditor over the new note payable.
The journal entry is debiting retained earnings and credit note payable.
| Account | Debit | Credit |
|---|---|---|
| Retained Earning | 000 | |
| Note Payable | 000 |
On the due date, the company will settle the note payable with the shareholders who are also the creditor.
The journal entry is debating note payable and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Note Payable | 000 | |
| Cash | 000 |
Example
Company ABC is preparing the dividend to the shareholders. However, the company does not have enough cash to pay the dividend. The management team decides to use the scrip dividend total amount of $ 35,000 for all shareholders. The company will issue notes payable to the shareholders.
Please prepare a journal entry for the scrip dividend.
The company issued dividends to shareholders in form of the note payable. The shareholders will become the creditor over the note payable base on the share percentage.
The journal entry is debiting retained earning $ 35,000 and credit note payable $ 35,000.
| Account | Debit | Credit |
|---|---|---|
| Retained Earning | 35,000 | |
| Note Payable | 35,000 |
The retained earnings will be decreased by $ 35,000. The company will increase the note payable by $ 35,000 on the balance sheet.
On the due date, company settles the note payable with the shareholders (creditors). The journal entry is debiting notes payable $ 35,000 and credit cash $ 35,000.
| Account | Debit | Credit |
|---|---|---|
| Note Payable | 35,000 | |
| Cash | 35,000 |