Dividends are payments made from a company to its shareholders. The payments are a return on investment from shareholder investments, meaning the company must properly account for these payments in their accounting ledger.
Dividends do not affect net income on the company’s financial statement. Retained earnings--monies earned that the company keeps to improve operations--is the source for paying dividends. Retained earnings will include net income after the company closes its accounting ledger each period.
When companies pay a cash dividend, they will reduce their retained earnings account. The retained earnings account has a credit balance, meaning accountants will debit the account and credit a dividend payable account. When paid, the dividends payable account receives a debit and the cash account receives a credit.
Publicly held companies will issue dividends depending on the type of stock issued and scheduled dividend payment schedule. While preferred stock will always receive dividend payments, common stock will only receive payments as the company decides.