How to record the dividend declared and paid

In business, the company, as a corporation, may need to declare and pay dividends to its shareholders once or twice a year. Likewise, it needs to record the dividend declared as well as the dividend paid to the shareholders with the proper journal entries in order to account for the liability upon the declaration of the dividend as well as cash outflow when the dividend is paid out.

Of course, the board of directors of the company usually needs to make the approval on the dividend payment before it can declare and make the dividend payment to the shareholders. And the company usually needs to have sufficient cash in order to pay the dividend to its shareholders.

How to record dividend declared

The company can record the dividend declared with the journal entry of debiting the dividend declared account and crediting the dividend payable 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.

On the other hand, the dividend payable account is a liability account on the balance sheet that represents the amount of the dividend that the company owes to its shareholders as of the declaration date of the dividend.

Likewise, this journal entry of dividend declared that the company record will increase total liabilities while decreasing total equity on the balance sheet.

How to record dividend paid

Later, when the company pays the cash dividend to the shareholders, it needs to make another journal entry in order to account for the cash outflow from the business as well as to eliminate the dividend payable that it has recorded previously.

In this case, the company can record the dividend paid to the shareholders with the journal entry of debiting the dividend payable account and crediting the cash account.

This journal entry will reduce both total assets and total liabilities on the balance sheet by the same amount.

Example for dividend declared and paid

For example, on June 15, the company ABC, which is a corporation, has declared a total of $100,000 of cash dividend to be paid to its shareholders. This $100,000 is to be paid on July 10 of the next month.

In this case, the company ABC can record the $100,000 dividend declared on June 15 by debiting the $100,000 to the dividend declared account and crediting the same amount to the dividend payable account.

Dividend declared on June 15:

This journal entry of recording the dividend declared will increase total liabilities by $100,000 while decreasing the total equity by the same amount of $100,000.

Later, on July 10, the company ABC can record the $100,000 dividend paid to shareholders with the debit of dividend payable account and the credit of the cash account as below:

Dividend paid on July 10:

This journal entry of recording the dividend paid to the shareholders will remove the $100,000 dividend payable that it has recorded on June 15, from the balance sheet while decreasing the cash balance by $100,000 as of July 10.

Directly deduct retained earnings for dividends declared

Some companies may directly deduct retained earnings as a result of the dividend declared without using the temporary account (e.g. dividend declared account) when it declares the dividend to be paid to the shareholders. This usually happens with companies that do not bother to keep a record of the dividend declared and paid.

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 period as the amount of the dividend declared will directly deduct the balance of the retained earnings.

In this case, the company can record the dividend declared by directly debiting the retained earnings account and crediting the dividend payable account.

Dividend declared:

In this journal entry, the balance of the retained earnings will reduce by the total amount of dividend declared as of the dividend declaration date.

Of course, the company will record the journal entry for dividends paid to its shareholders the same of debiting the dividend payable account and crediting the cash account:

Dividend paid:

For example, if the company ABC in the example above does not have the dividend declared account, it can directly deduct the amount of dividend declared from the retained earnings account.

In this case, it can record the $100,000 dividend declared and paid to its shareholders in the journal entries below instead:

Dividend declared on June 15:

This journal entry will directly reduce the balance of the retained earnings by $100,000 as of June 15.

Dividend paid on July 10: