When a corporation makes a profit, a portion of that profit is typically set aside to be used as a payout to the company's stockholders. Paying out dividends to stockholders is a normal part of the business process for many corporations. As with other corporate transactions, it is up to the accounting department to make the related journal entries. The accounting information system requires multiple entries as part of the dividend process. Each entry will include two separate account entries using the double-entry accounting method.
Calculate the total amount of dividends to be paid. The company's board of directors will decide to allocate a certain amount of the company's retained earnings to be paid out to shareholders. This is usually in the form of a set amount per shareholder. For example, if the company has sold 10,000 shares and the payout is $0.55 per share, the total dividends to be paid will be 10,000 x $0.55, or $5,500.
Create the journal entry authorizing payment of dividends. When you record this entry, you'll need two bits of information: the date the dividend was authorized by the board of directors, and the amount of the dividend to be paid. This entry will debit the Retained Earnings account and credit the Dividends Payable account. For this example, debit Retained Earnings for $5,500 and credit Dividends Payable for $5,500.
Journalize the dividend payment. Once the company actually pays shareholders their dividends, you need to create a second journal entry. Date this entry for the actual date of payment. Enter a debit for the Dividends Payable account and a credit for the Cash account. For this example, debit Dividends Payable for $5,500 and credit Cash for $5,500.