How to Record Dividends in a Journal Entry

Use a ledger to record journal entries of dividends.

There are two main ways to receive income from stock ownership: share price appreciation and dividends. As a company's earnings go up, so should the dividends it pays, if they offer a dividend. Shareholders wait for dividend announcements to know when to expect the actual dividend payments to be available. Companies record dividends as a payment out of retained earnings. The actual journal entries associated with the dividend are made on the date of record, not the effective date.

Instructions

1. Review dividend terminology. The "declaration date" is the date the board approves the dividend payout. The "date of record" is the date which establishes which stockholders receive the dividend; that is, if you sell the stock one day before the day of record, you will not receive the dividend. The "effective date" is the day the dividend is disbursed to shareholders.

2. Follow the standard formula. XYZ Corporation has 10,000 shares of common stock outstanding. On Nov. 10, the board of directors declared a $1 per share cash dividend, to be paid to stockholders of record on Nov. 30. The dividend was distributed on Dec. 10.

3. Record the dividend journal entry on the day of record, which is Nov. 30. Make a debit to retained earnings for $10,000 ($1 x 10,000 shares) and a credit to dividends payable for $10,000. This is what the company issuing the dividend enters on the date of distribution.

4. Use a contra account to hold funds until the distribution date. In some cases, the company will want to create a contra (side) account to hold the dividends until they are actually paid. If this is this the case, then make a debit to dividends declared, and then close the balance as retained earnings on the effective (distribution) date.

References

• CCBA: Dividend Transactions