Which Dividends Do Not Reduce Stockholders' Equity?
A company prepares a stockholders' equity statement to tell financiers that its fundraising efforts have not screeched to a halt, and to reassure investors who stayed on the sidelines that they still can pour money into the business. Also known as an equity report, a shareholders' capital statement shows dividend distributions, including remittances that do not reduce investor equity.
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Equity Accounts
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To understand how a dividend distribution may not reduce stockholders' equity, it's helpful to understand the ins and outs of this financial account. Equity accounts include retained earnings, common stock, preferred stock and additional paid-in capital. The latter account marks the difference between a stock's stated value and its market worth. A corporate bookkeeper debits an equity account to reduce its worth and credits the account to increase its amount. Cash dividends and preferred stocks, which usually come from share repurchases, reduce stockholders' equity. Common or preferred stock issuance, net income and retained earnings have an opposite effect on shareholders' net worth.
Stock Dividends
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Stock dividends do not reduce shareholders' equity. This makes sense, conceptually and in terms of accounting procedures. Typically, a company that declares stock dividends is merely increasing the number of its outstanding shares. In essence, the business sees a hike in the common stock account and no change in the equity master account, because a corresponding reduction in retained earnings offsets the increase in the common stock account. The explanation becomes clearer when it comes to accounting. To record a stock dividend, a corporate bookkeeper debits the retained earnings account, crediting the common stock account and the additional paid-in capital account.
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Cash Dividends
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To get a clearer picture of corporate dividend payments, it's useful to see the other side of the remittance coin and understand the mechanics of cash dividends. There are three important dates in cash distribution processes: declaration, record and payment. On the day corporate management declares dividends, a bookkeeper debits the retained earnings account and credits the dividends payable account. The record date marks when a stockholder must possess shares to be eligible for dividends. The bookkeeper makes no entry on the record date. On the payment date, the junior accountant debits the dividends payable account, to bring it back to zero, and credits the cash account. Doing so reduces funds in company coffers, unlike in the banking industry.
Financial Reporting
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Besides the statement of shareholders' equity, dividend payments -- as well as other equity-reduction events -- affect other accounting reports. For example, dividends payable is integral to the statement of financial position, also called a balance sheet. Accountants report dividend remittances in the statement of cash flows.
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