What Account Statement Are Dividends Reported On?
A publicly listed company that does not pay dividends regularly to its shareholders is a dreaded investment scenario for financial-market participants. A firm that does not pay dividends may see its share price decrease, as investors may believe the lack of dividend payments means weak liquidity levels. Accountants report dividends in the statement of retained earnings.
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Definition
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Dividends constitute the compensation that shareholders receive after investing in a company. Simply put, dividends can be considered "interest income" on stocks. Shareholders, also known as shareholders or buyers of equity, receive periodic dividends. As such, the cash dividends account is an equity statement item. "Dividends payable" is a balance sheet component. An equity statement is also known as a retained earnings statement. "Balance sheet," "statement of financial condition" and "statement of financial position" are similar terms.
Significance
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Companies ensure that dividend-payment policies are in line with industry practices and regulatory guidelines, such as U.S. Securities and Exchange Commission rules. Equally important, corporate executives make sure dividend payments do not cause a firm to experience short-term liquidity shortages, which are usually unfavorable for a company's working capital. (Working capital equals short-term assets minus short-term liabilities and measures a company's short-term cash availability.) In managing corporate dividend-payment policies, top leadership tries to meet shareholders' needs while keeping operating activities financially sound.
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Types
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To pay dividends, a company can send checks to shareholders or issue additional shares of equity. Selecting a dividend-payment option can often be a challenge to corporate management. Shareholders generally prefer cash dividends because they may reinvest funds in other places. In contrast, companies prefer stock-dividend payments because of the cash savings.
Accounting for Dividends
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In the corporate context, dividend-payment activities occur at three different dates: declaration, "as of record" and payment dates. Accounting entries are distinct for each date. For example, the board of directors of a U.S.-based company declares on May 1 that the company will pay $1 million in dividends to shareholders who own shares as of May 15. The payment date is June 2.
On May 1, a corporate bookkeeper credits the dividends payable account for $1 million and debits the retained earnings account for the same amount. There's no entry on May 15. On June 2, the bookkeeper debits the dividends payable account for $1 million and credits the cash account for the same amount. In accounting language, crediting cash --- an asset account --- means decreasing the account's balance.
Reporting
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Corporate accountants report dividends on the statement of changes in stockholders' equity and as a cash outflow in the financing section of the statement of cash flows. Accordingly, dividend entries affect two financial statements: a statement of retained earnings and a statement of cash flows. Dividends are not operating expenses and therefore are not income statement items. (An income statement is otherwise referred to as a statement of profit and loss.) A corporate statement of cash flows provides insight into a company's cash flows from operating, investing and financing activities.
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