Definition of Dividend Payment to Stockholders
A dividend payment to stockholders is usually a cash payment which reduces the corporation’s asset cash and the corporation’s stockholders’ equity. There are actually two steps required for a corporation to make a dividend payment:
- The corporation’s board of directors must declare the dividend, and
- The corporation must distribute the cash
Example of Recording a Dividend Payment to Stockholders
On the date that the board of directors declares the dividend, the stockholders’ equity account Retained Earnings is debited for the total amount of the dividend that will be paid and the current liability account Dividends Payable is credited for the same amount. (Some corporations will debit the temporary account Dividends instead of debiting Retained Earnings. Then at the end of the year, the Dividends account is closed to Retained Earnings.)
The second entry occurs on the date of the payment to the stockholders. On that date the current liability account Dividends Payable is debited and the asset account Cash is credited.
