Cash dividend is a distribution of earnings by cash to the shareholders of the company. The journal entry of cash dividends is usually made in two parts. One is on the declaration date of the dividend and another is on the payment date.
The company usually needs to have adequate cash and sufficient retained earnings to payout the cash dividend. This is due to, in many jurisdictions, paying out the cash dividend from the company’s common stock is usually not allowed. And of course, dividends needed to be declared first before it can be distributed or paid out.
The company can make the cash dividend journal entry at the declaration date by debiting the cash dividends account and crediting the dividends payable account.
Cash dividends account is a contra account to the retained earnings. It is a temporary account that will be closed to the retained earnings at the end of the year.
Similar to the stock dividends, some companies may directly debit the retained earnings on the date of dividend declaration without the need to have the cash dividends account. This is usually the case which they do not want to bother keeping the general ledger of the current year dividends.
In this case, the journal entry at the dividend declaration date will not have the cash dividends account, but the retained earnings account instead.
When the company makes the dividend payment to the shareholders, it can make the journal entry by debiting the dividends payable account and crediting the cash account.
This journal entry is made to eliminate the dividends payable that the company has made at the declaration date as well as to recognize the cash outflow that is not an expense.
For example, on December 14, 2020, the company ABC declares a cash dividend of $0.5 per share to its shareholders with the record date of December 31, 2020. The payment of the cash dividend will be made on January 8, 2021.
The company ABC has a total of 100,000 shares of common stock.
Solution:
On December 14, 2020
The company ABC can make the journal entry when it declares the cash dividend on December 14, 2020, with the dividends payable of $50,000 (100,000 x $0.5) as below:
On January 8, 2020
When the company ABC pays the $50,000 of the cash dividend on January 8, 2021, it can make the journal entry as below:
It is useful to note that the record date is the date the company determines the ownership of the shares for the dividend payment. Like in the example above, there is no journal entry required on the record date at all.
Also, in the journal entry of cash dividends, some companies may use the term “dividends declared” instead of “cash dividends”. However, the cash dividends and the dividends declared accounts are usually the same.
Though, the term “cash dividends” is easier to distinguish itself from the stock dividends account which is a completely different type of dividend.