If a financial statement date intervenes between the declaration and distribution dates, the Stock Dividend Distributable account should be disclosed as part of Paid-In Capital. The subsequent distribution will reduce the Common Stock Dividends Distributable account with a debit and increase the Common Stock account with a credit for the $9,000. Any net income not paid to equity holders is retained for investment in the business.
However, the statement of cash flows will not show the $250,000 dividend as it has not been paid yet; hence no cash is involved here yet. We can illustrate each account type and its corresponding debit and credit effects in the form of an expanded accounting equation. When a cash dividend is paid, the stock price generally drops by the amount of the dividend.
Some companies issue shares of stock as a dividend rather than cash or property. This often occurs when the company has insufficient cash but wants to keep its investors happy. When a company issues a stock dividend, it distributes additional shares of stock to existing shareholders. These shareholders do not have to pay income taxes on stock dividends when they receive them; instead, they are taxed when the investor sells them in the future. If each share is currently worth $20 on the market, the total value of the dividend would equal $200,000.
Retained earnings are part of equity, which represents the owners’ claim on the assets of the company. Dividends payable are part of liabilities, which represent the obligations of the company to others. By debiting retained earnings and crediting dividends payable, the company is moving equity to liabilities, reducing its net worth. When the dividends are paid, the effect on the balance sheet is a decrease in the company’s retained earnings and its cash balance. In other words, retained earnings and cash are reduced by the total value of the dividend. The ultimate effect of cash dividends on the company’s balance sheet is a reduction in cash for $250,000 on the asset side, and a reduction in retained earnings for $250,000 on the equity side.
While a company technically has no control over its common stock price, a stock’s market value is often affected by a stock split. When a split occurs, the market value per share is reduced to balance the increase in the number of outstanding shares. In a 2-for-1 split, for example, the value per share typically will be reduced by half. As such, although the number of outstanding shares and the price change, the total market value remains constant. If you buy a candy bar for $1 and cut it in half, each half is now worth $0.50.
To record the dividend payment, the company debits its dividends payable account and credits its cash account. In this journal entry, the dividend declared account is a contra account to the retained earnings account under the equity section of the balance sheet. The dividend declared account is a temporary account in which it will be cleared at the end of the period with the retained earnings account. If the company owns less than 20% shares of stock of another company, it can record the dividend received as the dividend income.
The company makes journal entry on this date to eliminate the dividend payable and reduce the cash in the amount of dividends declared. Declaration date is the date that the board of directors declares the dividend to be paid to shareholders. It is the date that the company commits to the legal obligation of paying dividend. Hence, the company needs to make a proper journal entry for the declared dividend on this date.
There won’t be a temporary account, such as the dividend decleared account, in the journal entry of the dividend declared in this case. Hence, the company does not have a record of the dividend declared during the accounting accounts payable job description period as the amount of the dividend declared will directly deduct the balance of the retained earnings. This usually happens with companies that do not bother to keep a record of the dividend declared and paid.
This is due to when the company issues the large stock dividend, the value assigned to the dividend is the par value of the common stock, not the market price. Common stock dividend distributable is an equity account, not a liability account. Likewise, this account is presented under the common stock in the equity section of the balance sheet if the company closes the account before the distribution date of the stock dividend. The total stockholders’ equity on the company’s balance sheet before and after the split remain the same.