How to Journalize Dividends Payable
A dividend is a payment made from a corporation to the shareholders of the business. A corporation’s board of directors has the responsibility of authorizing dividends to shareholders. The board of directors may authorize stock, property or cash dividends. The board of directors determines the amount of the dividend and the number of shares that receive a dividend payment. When the board of directors authorizes a dividend, it creates an obligation for the company to pay its shareholders. Dividends decrease the amount of equity that shareholders have in the business.
Other People Are Reading
Instructions
-
-
1
Confirm the amount of the dividend. Verify the number of shares that will receive a dividend payment and the dividend payment per share. For instance, a board of directors that authorizes a dividend payment of 50 cents per share to 2 million shareholders, has a dividend payable amount of $1 million.
-
2
Write the month and day of the transaction in the general journal. The date entered must correspond with the date when the board of directors declared the dividend.
-
-
3
Debit the retained earnings account for the applicable amount. A debit to retained earnings indicates a reduction in shareholders’ equity. The amount of the retained earnings debit will equal the amount of dividends the company pays its shareholders.
-
4
Credit the dividends payable account for the applicable amount. Crediting dividends payable increases the company’s obligation to its shareholders. Let’s assume a board of directors declares a $1 million dividend payment. In this scenario, the company must credit dividends payable for $1 million and debit retained earnings for $1 million.
-
1
