What is a Cash Dividend?

what-is-a-cash-dividend

When it is assumed that the firm pays a dividend on the same day it had decided to do so, accounting is straightforward. Cash is reduced, and a temporary T-accounts ‘dividends declared’ is used to record the decrease in retained earnings. At the end of the period, when the period is closed, dividends declared is subtracted from retained earnings.


Cash Dividend Declaration Example

The firm declares a 0.10 dividend per share. There are 200,000 shares issued and outstanding.

The journal entry:

T-account Debit Credit
Dividend declared 20,000
Cash 20,000

However, normally there will be time between the decision to pay a dividend (the declaration) and the actual payment. This requires the need to identify which person will receive the dividend, as with stock listed companies ownership changes continuously. Three dates are relevant: (1) the declaration date, (2) the date of record and (3) the payment date.

On the declaration date, management decides to pay a certain dividend. The dividend is either expressed as an amount for each share, or as a percentage of the par value of the share. Investors that owned the share on the date of record will receive the dividend on the payment date. On the day following the date of record the share goes ‘ex-dividend’, meaning that if you will buy the share on (or after) that day, you will not receive the dividend.

A liability T-account ‘Dividend payable’ is used to bridge the time between promising the dividend on the declaration date and the actual payment.


Cash Dividend Example


The firm has issued 100,000 shares with a par value of 5 each, of these shares, 10,000 have been repurchased as treasury shares. On December 15th, management declares of 10% dividend, payable on February 1st to shareholders on record on January 15th.

The journal entry for the declaration on December 15th:

T-account Debit Credit
Dividend declared 45,000*
Dividend payable 45,000

*4,500 = 90,000 shares outstanding x 5 par value x 10% dividend

No journal entry is needed for the date of record.

The journal entry for the payment date (February 1st):

T-account Debit Credit
Dividend payable 45,000
Cash 45,000

Cash Dividends Explained

Key points:

– declarations of dividend are recorded on a temporary T-account ‘dividends declared’, which at year’s end is subtracted from retained earnings

– the declaration date is the date on which management decides to pay out a dividend, at this time a liability ‘dividends payable’ is recorded

– the date of record is the date which is used to whom the dividend is paid; the next day the shares go ‘ex-dividend’

– on the payment date the liability ‘dividends payable’ is paid

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