Your Ask Joey ™ Answer

What is the journal entry to record a dividend payable?

  1. Home
  2. »
  3. Question
  4. »
  5. What is the journal entry to record a dividend payable?

What exactly are Dividends Payable?

This question unfolds once a corporation’s board of directors approves and declares a proposed cash dividend, setting the stage for distributing dividends to shareholders.

Are Dividends Liabilities?

Despite the cash remaining within the company at the time of declaration, declaring a dividend requires a new entry on the balance sheet: “Dividends Payable.” Classified as a current liability, this entry signifies a board-approved future cash outflow—a promise to pay shareholders.

Dividends Payable Simplified

When a company decides to share some of its profits with its shareholders, it puts the amount it wants to give away in an account called “Dividends Payable.”

As soon as the Board of Directors approves and announces a dividend (on the declaration date) , the company must record a payable in the liability section of the balance sheet. 

Image of Doola start your business from anywhere and keep it 100% compliant

Formation, EIN, Registered Agent, Annual State Filings, Federal Tax Filings and a Dedicated Account Manager. Grow your business and let doola handle your business compliance needs.

Quickbooks Banner Logo Image
Image exemplifying dividend declarations and their financial statement impacts

Dividends Declared Journal Entry

Dividends are paid out of the company’s retained earnings, so the journal entry would be a debit to retained earnings and a credit to dividend payable. It is important to realize that the actual cash outflow doesn’t occur until the payment date.

This shows the company plans to pay dividends. But, the company doesn’t have to pay these dividends if it decides not to; it’s their choice. 

This is different from paying back a loan, where the company must pay interest. So, paying dividends is more like a nice thing a company can do, not something it must do.

Image of a dividend being declared to shareholders

Dividend Terminology

Ex-dividend date – This is the last date that you can purchase the stock and receive the dividend payment was declared. Anyone who buys the stock after the ex-dividend date is not entitled to the dividend payment.

Date of record- The date on which the board of directors determines the date on which shareholders’ names will be able to receive specified dividends.

Payment date –The payment date is the date on which the board of directors specifies dividends that are distributed to the shareholders.

Dividend Financial Statement Impact

When a company issues cash and other property dividends it will reduce both a company’s overall assets as well as its retained earnings. Liabilities will also be recognized as of the date of declaration. You should be familiar with the different types of dividend distributions and how they should be recorded.

Cash dividends – are dividends that are distributed form retained earnings in the form of cash. When distributions from cash are made, expenses will not be recorded, but liabilities will at the date of declaration. Any unpaid dividends in a given year can accumulate if they are associated with cumulative preferred stock. These are referred to as dividends in arrears. Dividends in arrears are disclosed in the footnotes.

Image showing how cash dividends impact the balance sheet

Cash Dividend Journal Entry

A cash dividend journal entry is made when a company decides to distribute a portion of its earnings to its shareholders. Initially, the cash dividend journal entry involves debiting the “Retained Earnings” account, which reduces the company’s equity, and crediting “Dividends Payable,” signaling the commitment to pay. This cash dividend journal entry signifies the company’s declaration to share profits. Finally, when the cash is handed out to shareholders, another cash dividend journal entry is recorded, debiting “Dividends Payable” and crediting “Cash,” which completes the transaction by showing the actual payment.

Cash Dividend Journal Entry Example

Toto Corp. declares a cash dividend of $10,000 on January 30th of the current year. The company doesn’t payout the dividend until March 15th. How should Toto record the dividend declaration and payment for the current year?

Back To All Questions

You might also be interested in...