Where Is a Declared But Unissued Cash Dividend to Be Reported on the Balance Sheet?
Cash dividend payments to stockholders involve several different dates that are recorded separately in your company’s books. Two dates concerning the dividend declaration and payment process affect your balance sheet. Declared but unissued cash dividends must be accounted for on the balance sheet in a specific manner to prepare your books for the actual dividend payout.
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Date of Declaration
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The date of declaration is the day you announce that cash dividends will be available to your stockholders, but it's not the date that cash dividends are issued. However, the date of declaration is the day your company accrues a debt for the dividends in the amount of cash you state will be paid. Dividends are not paid on this date, but declaring that the cash dividends will be paid has an effect on the balance sheet and adjustments must be made to reflect the declared dividend.
Date of Record
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The dividend date of record isn't necessarily an event that results in changes to your balance sheet, but is a date that must be recorded for accounting purposes. The date of record indicates the day your corporation verifies the stockholders who'll receive cash dividends. Only the stockholders who own shares on the date of record receive the payments. In some cases, stockholders sell, gift or otherwise dispose of the stock held within your company after the date of declaration. If a stockholder relinquishes his stock after the date of declaration, but before the date of record, he doesn't receive any cash dividend. For example, if a stockholder gifts his shares to another person after the declaration date, but before the date of record, the person receiving the gift earns the cash dividends because he will be the new stockholder on the record date. Similarly, if the original stockholder sells his stock and a new party purchases the shares prior to the date of record, the new stockholder will receive the cash dividends that have been declared.
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Date of Distribution
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Cash dividends are paid to stockholders on the date of distribution. The date of distribution is generally not the same as the declaration date or the date of record, but is a separate date to record as a dividend-related transaction for accounting purposes. The date of distribution also has an effect on the balance sheet, as it's the date that the cash paid to stockholders must be accounted for.
Balance Sheet Entries
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The first dividend activity date that causes a shift on the balance sheet is the declaration date. On this date, you must subtract the balance of the declaration from the retained earnings shown on the balance sheet and move it to your “dividends payable” liability account. The effect of the date of declaration process for your balance sheet is an increase in corporate liability and a decrease in retained earnings. The second date that affects the balance sheet is the date of distribution. On this date, the dividends payable account is reduced to reflect the amount of cash dividends that are paid. In addition, the amount paid must be subtracted from the cash account. The total effect of the date of distribution is a reduction of both liabilities and assets.
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