Accounting for dividends

[John Edwards]

On Mon, Apr 12, 2010 at 8:36 AM, Mike or Penny Novack
<stepbystepfarm at mtdata.com> wrote:

> I am not an accountant (hence not qualified to advise). And I never had to
> keep the books for a business corporation (The 501(c)3 organization for
> which I keep books of course neither pays dividends nor taxes). But from
> memory of having once read some "Accounting 101" books.
>
> 1) Dividends become a corporate liability when declared by the board. Thus a
> transfer between equity and liability (which are on the same side of the
> books).
> 2) When paid a decrease in that liability and the current account against
> which the dividend checks drawn (which are on opposite sides of the books).
>
> In a large/normal corporation normally a significant time difference between
> those dates. I suspect the problem here in not seeing how to record the
> transactions is that with the very small, closely held, maybe sole
> corporation on the same date and so not seeing that really two transactions.

There are three dates involved in Dividends:

1. Declaration Date: This is when the board declares a dividend,
usually to be payable at a later date. At this point, it becomes a
liability (Debit Retained Earnings, Credit Dividends Payable)

2. Record Date: This is the date on which the shareholders will be
determined for the payment of the dividend. This applies largely to
publicly-traded companies, where ownership can be a fluid situation.
No accounting entries are made on this date.

3. Payment Date: This is when the cheques are actually issued. At this
point, the liability is taken care of (Debit Dividends Payable, Credit
Cash).

The usual examples that I remember had a month or so from the first
date to the last. For example, a board could declare the dividend on
March 15 (Declaration date), to the shareholders of record as of the
end of business on March 31 (Record Date), payable on April 15
(Payment date).

If, for a corporation that had a small number of shareholders, all
three dates are the same, then the Liability step could be eliminated,
giving you a DR to Retained Earnings and a CR to Cash.

John

-- 
John Edwards
"You can insure against the weather, but you can't insure against
incompetence, can you?" - Phil Tufnell