How to Adjust Journal Entries on Declared Dividends
A dividend occurs when a corporation issues cash, property or stocks to the shareholders of the business. The corporation’s board of directors has the responsibility of declaring a dividend and setting the dividend price per share that shareholders receive. An initial entry must be made in the general journal to indicate the date and the amount of the dividend. This creates a liability for the company because it has an obligation to pay the dividend after the board of directors makes a dividend declaration. After the initial dividend entry, the company must adjust it to indicate the payment issued to stockholders.
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Instructions
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Record the date of the dividend payment in the general journal. Write the day and month of the payment, which can be verified from the company’s bank account statement if the company issues cash.
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Debit dividends payable for the applicable amount. This entry illustrates a decrease in the company’s dividend obligation. The dividend payable debit must equal the amount of cash the company will pay to its shareholders in the form of dividends. If a company declares a $.75 dividend on 1 million shares, it will have to pay $750,000 to its shareholders. In this scenario, the corporation will debit dividends payable for $750,000.
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Credit the cash account for the applicable amount. Debits must equal credits, meaning the credit to cash will equal the debit to dividends payable. If the company debits dividends payable for $750,000, it must credit cash for $750,000. This transaction shows that the company’s cash decreased by $750,000 as a result of the dividend payment.
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