What are Dividends? | Accounting Student Guide


What is a Dividend?

A Dividend is a payout of earnings by a corporation to its stockholders. Dividends can be cash dividends or stock dividends. A dividend is paid per share of stock. The amount of earnings being distributed is “divided” among all shareholders.

For an overview of Dividends, watch this video:

Video explaining dividends.

Dividend Dates Explained

Three important dates impact the distribution of dividends and the related accounting transactions:

  1. Date of declaration: this is the date the board of directors announces the payout of dividends.
  2. Date of record: this date determines which stockholders will receive dividends. They must own stock as of this date to be included.
  3. Date of payment: the date when the actual distribution of cash or stocks in made.

Types of Dividends

The two most common types of dividends are cash dividends and stock dividends. Corporations may also do a property (asset) dividend or a liquidation dividend. Cash dividends are the most common type of dividend.

What is a Cash Dividend?

A cash dividend is a cash distribution of a corporation’s earnings. It is the most common form of dividend. Cash dividends are granted when there are sufficient retained earnings to distribute, sufficient cash available to distribute, and a formal action by the board of directors to make a distribution.

What is a Stock Dividend?

A stock dividend is a distribution of stock to existing stockholders. Generally, stock dividends are made only on common stock, not preferred stock. A corporation may choose to do a stock dividend rather than a cash dividend if the board of directors wants to reward stockholders but preserve cash and earnings in the corporation for current or future needs.

What is the Difference Between Preferred Stock Dividends and Common Stock Dividends?

Preferred Stock dividends receive a fixed dividend amount each year. Preferred Stock dividends are paid first with any remaining available dividends being distributed to Common Stock owners. Common Stock dividends can vary each year.

Cash Dividends for Preferred Stock

Cash dividends for Preferred Stock are paid based on the par value of the stock and the stated rate of the dividend. For example, preferred stock with a par value of $50 and a stated rate of 8% receive a cash dividend of $4.00 per share. [$50 x .08=$4]. A stockholder with 1,000 shares of preferred stock would be eligible for a $4,000 dividend [$4 x 1,000=$4,000].

Accounting for Preferred Stock Dividends

Accounting transactions for Preferred Stock dividends are based on the total amount of shares outstanding, total dividend being distributed, and the dates of declaration, record, and payment.

To illustrate, assume a corporation declares a preferred stock dividend on June 1 with a date of record of June 30 and a payment date of July 31. The corporation has 5,000 shares of $50 par 8% preferred stock. The corporation will distribute a total of $20,000 in dividends.

On the date of declaration, June 1, the corporation records the following journal entry to record the liability for the dividends owed to stock holders:

Cash Dividends20,000
Cash Dividends Payable20,000

On the date of record, June 30, no journal entry is necessary. Any stockholders who own stock on this date will be included in the distribution of dividends.

On the date of payment, July 31, the corporation pays out the dividends and enters the following journal entry:

Cash Dividends Payable20,000
Cash 20,000

Cumulative Preferred Stock Dividends

Cumulative Preferred Stock is preferred stock that has a provision stating that any missed dividends will be paid in full in subsequent periods. If preferred stock is entitled to $20,000 in dividends in a year, but only $18,000 in dividends is available, the $2,000 of unpaid dividends will be paid in the next year. In the second year, preferred stock is due $20,000 for the current year plus $2,000 for the prior year.

Preferred Stock: Dividends in Arrears

When the required amount of cumulative preferred stock dividends is not paid out in the current year, the dividends are said to be “in arrears.” The obligation to pay the amount owed carries forward to future periods until the arrearage is paid in full. Until the full amount of preferred dividends is paid, common stock will receive no dividends.

Accounting for Preferred Stock Dividends in Arrears

To illustrate, assume a corporation declares a preferred stock dividend on June 1 with a date of record of June 30 and a payment date of July 31. The corporation has 5,000 shares of $50 par 8% preferred stock. The corporation will distribute a total of $15,000 in dividends. Total dividends due to preferred stock is $20,000. [5,000 shares x $50 par x .08 rate]

The following journal entry is done of the date of declaration, June 1:

Cash Dividends15,000
Cash Dividends Payable15,000

The amount of the cumulative preferred stock in arrearage is considered an undeclared dividend and is not recorded in Dividends Payable as a liability. Instead, it is disclosed in the notes of the balance sheet. the $5,000 arrearage is carried forward to the next year.

On the date of record, June 30, no journal entry is necessary. Any stockholders who own stock on this date will be included in the distribution of dividends.

On the date of payment, July 31, the corporation pays out the dividends and enters the following journal entry:

Cash Dividends Payable15,000
Cash 15,000
Journal entry to record payment of dividends.

In the second year, the corporation declares a dividend of $30,000, same dates as before.

The following journal entry is done of the date of declaration, June 1:

Cash Dividends30,000
Cash Dividends Payable25,000
Cash Dividends Payable-Cumulative Preferred Arrearage 5,000
Journal entry to record declaration of dividends.

Because the dividend amount is sufficient to pay all preferred dividends due, the amount is now entered as a liability.

On the date of record, June 30, no journal entry is necessary. Any stockholders who own stock on this date will be included in the distribution of dividends.

On the date of payment, July 31, the corporation pays out the dividends and enters the following journal entry:

Cash Dividends Payable25,000
Cash Dividends Payable-Cumulative Preferred Arrearage 5,000
Cash 30,000
Journal entry to record declaration of dividends.

The amount in Cash Dividends Payable will be distributed first to Preferred Stock for the full amount due for Year 2, $20,000, with the remaining amount going to Common Stock dividends, $5,000. Preferred Stock receives a total of $25,000 [Year One arrearage of $5,000 plus Year Two dividend of $20,000].

Cash Dividends for Common Stock

Cash Dividends for Common Stock are amounts paid from the earnings of a corporation. Dividends for Common Stock are distributed amounts are based on the remainder of available dividends after Preferred Stock receives required dividends. Cash Dividends for Common Stock are divided per share for all outstanding shares of common stock.

To illustrate, a corporation has $5,000 of cash dividends to distribute to common stock holders. There are 10,000 shares of common stock outstanding. Common Stock holders will receive a cash dividend of .50 per share [$5,000 / 10,000 shares]. A common stock holder with 1,000 shares will receive $500 of the total dividend available [1,000 shares x .50 per share]

Accounting for Common Stock: Cash Dividends

Accounting transactions for Common Stock dividends are based on the total amount of shares outstanding, total dividend being distributed, and the dates of declaration, record, and payment.

To illustrate, assume a corporation declares a Common Stock dividend on June 1 with a date of record of June 30 and a payment date of July 31. The corporation has 10,000 shares of $10 par common stock. The corporation will distribute a total of $5,000 in common stock dividends.

On the date of declaration, June 1, the corporation records the following journal entry to record the liability for the dividends owed to stock holders:

Cash Dividends5,000
Cash Dividends Payable5,000
Journal entry to record declaration of dividends.

On the date of record, June 30, no journal entry is necessary. Any stockholders who own stock on this date will be included in the distribution of dividends.

On the date of payment, July 31, the corporation pays out the dividends and enters the following journal entry:

Cash Dividends Payable5,000
Cash 5,000
Journal entry to record payment of dividends.

Stock Dividends for Common Stock

Accounting transactions for stock dividends differ from cash dividends because stock dividends do not impact cash. The stock dividend is a percent of current outstanding stock. The amount of the stock dividend is transferred from Retained Earnings to Paid-in Capital. The market value of the stock on the dividend declaration date is generally used to determine the amount transferred. Generally, stock dividends are only issued for common stock shares.

Accounting for Common Stock: Stock Dividends

To illustrate, assume a corporation declares a stock dividend on June 1 with a date of record of June 30 and a payment date of July 31. The corporation has 5,000 shares of $10 par common stock with a current market value of $25. The corporation declares a 5% stock dividend.

On the date of declaration, June 1, the corporation records the following journal entry to record the liability for the dividends owed to stock holders:

Stock Dividends [5,000 shares x 5% x $25 market value]6,250
Stock Dividends Distributable [5,000 shares x 5% x $10 par]2,500
Paid-in Capital in Excess of Par–Common Stock [5000 shares x 5% x ($25-$10)]3,750
Journal entry to record declaration of stock dividends.

On the date of record, June 30, no journal entry is necessary. Any stockholders who own stock on this date will be included in the distribution of dividends.

On the date of payment, July 31, the corporation pays out the stock dividends and enters the following journal entry:

Cash Dividends Distributable6,250
Common Stock6,250
Journal entry to record distribution of stock dividends.

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 11 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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