How Are Dividends Shown on Company Accounts?
Dividends are payments companies make on certain stocks. Paying dividends is a way a company shares its profits with stockholders. Dividends are typically first declared, then paid at a later date.
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Description
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When dividends are declared by a company, a journal entry is recorded in the accounting books to record the transaction. This entry is made by posting a debit to the Retained Earnings account and a credit to Dividends Payable.
Retained Earnings
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Dividends are paid out of a company's earnings. All earnings of a company are placed in an equity account called Retained Earnings. When a dividend is declared, the amount of dividends is immediately taken out of the Retained Earnings account to account for the future payment. Retained Earnings is an equity account and therefore has a normal credit balance. Debits to this account decrease the account.
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Dividends Payable
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Dividends Payable is a liability account. When dividends are declared, a liability is created. The company must pay the dividends once declared. Liability accounts also have normal credit balances. Credits made to these accounts increase the balance they contain.
Payment
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When the payment for dividends is made, a debit to Dividends Payable is made and a credit to Cash. The debit eliminates the liability recorded on the books, while the credit to Cash decreases the cash account because asset accounts have normal debit balances.
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