Dividends
Dividends are a portion of the profits that a company distributes to shareholders in the form of dividends. In order to pay dividends, the company must receive a net profit, which it distributes to its shareholders.
Whether it will distribute and in what amount is up to the management of the company and shareholders. When a decision is made, the company issues a press release. It indicates the amount and the “cut-off date”.If the company has received a loss, then it is not worth counting on dividends. But there are exceptions: sometimes the top management of a company may decide to pay dividends from retained earnings of previous years or even borrow to please their shareholders. In addition, the company can pay dividends not only from net profit but also from EBITDA or free cash flow, depending on the dividend policy.
Dividends account
Dividends account is a place where bookkeepers record cash dividends declared by a company. This account exists in the books only during the accounting period and at the end of it, it is closed to the Retained earnings account. In other words, it is a Balance sheet account that is considered to be a temporary bookkeeping account.
For example, Dixie Company has 45,000 shares of $2 par value common stock outstanding on January 1, 20XX. The company also has retained earnings of $600,000. On March 1st, it declared a $0.25 per share cash dividend and on March 10th, the declared dividends were paid. How would it journalize these events?The first journal entry would be for the declaration of a cash dividend. So, we debit the Cash dividends account. The account we would credit would be Dividends payable because the company will be paying this dividend in the future. To find the amount, you would simply multiply the declared dividend per share by the number of shares or $0.25 x 45,000.DateAccountDRCRMarch 1stCash Dividends$11,250Dividends Payable$11,250Next, on March 10th, the company will pay this dividend. So, the bookkeeper will debit the Dividends payable to decrease that account. Then, they will credit the Cash because, in a cash dividend, a business is handing out cash to its shareholders.DateAccountDRCRMarch 10thDividends Payable$11,250Cash$11,250Finally, the dividends account is closed.DateAccountDRCRDecember 31stRetained Earnings$11,250Cash Dividends$11,250