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    Accounting Standards Library
    Saturday
    Aug142010

    How do I account for cash dividends?

    When the board of directors declares a cash dividend, you should debit the Retained Earnings account and credit the Dividends Payable account, thereby reducing equity and increasing liabilities. Thus, there is an immediate decline in the equity section of the balance sheet as soon as the board of directors declares a dividend, even though no cash has yet been paid out.

    When you eventually pay out the dividend, you debit the Dividends Payable account and credit the Cash account, thereby reducing both cash and the offsetting liability. The net effect of these two transactions is to reduce cash and equity, which means that the entire impact of the cash dividend is contained within the balance sheet; there is no impact on the income statement, though the payment will appear as a use of cash in the financing activities section of the statement of cash flows.

    For example, the board of directors of Hostetler Corporation declares a $1 dividend for each of the company's 10,000 shares outstanding. You would record the following entry:

      Debit Credit
    Retained Earnings 10,000  
         Dividends Payable   10,000


    One month later, the company pays the dividend, so you record the following entry:

      Debit Credit
    Dividends Payable 10,000  
         Cash   10,000

     
    Related Topics

    Types of dividends
    What are dividends payable?
    What is a final dividend?
    What is an interim dividend?
    What is the ex-dividend date?

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