Why Is Debiting the Balance Normal for a Dividend Account?

Stocks often pay their stockholders a dividend.

Dividends are often paid to stockholders based on stock performance or agreement. Entries in the company's books record the dividends.

Date of Declaration

When a company declares a dividend on a stock, it is recorded on their books by debiting an account called "Dividends" and crediting the account "Dividends Payable."

Dividends

The Dividends account is considered a temporary account because its purpose is simply to track all dividends declared for the entire year. At the end of the year this account is closed.

Dividends Payable

When the dividend is actually paid, the Dividends Payable account is debited for the payment amount, and the cash account is credited.

Retained Earnings

At the end of the year, the Dividends account is closed by crediting the account for the full amount that is in it. The debit part of this entry goes to the account "Retained Earnings." This reduces retained earnings, which reflects the company's profit.

Income Distribution

Dividends are a distribution of income---not an expense---so the Dividends account is not reflected on the company's income statement.

Balance Sheet

On a company's balance sheet, the equity section is divided. One column indicates the owner's capital contributions; the other shows retained earnings. This division shows investors where the equity in the company originated. Dividends paid come out of retained earnings, which is a reflection of profit in the business.

References

• Accounting Coach: How do you Record a Dividend Payment to Stockholders?
• Accounting Coach: Stockholder's Equity
• American Institute of Professional Bookkeepers: Why Owners Love Their Retained Earnings Account