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How to Declare a Dividend in Principles of Accounting

Original post by Christopher Carter of Demand Media

A dividend is a disbursement paid to shareholders of a corporation. Dividends may be paid to a shareholder in the form of stock, cash or property. A corporation's board of directors decides when to declare dividends and the price per share that each shareholder receives. A company must have enough cash and money reinvested in the business before the board of directors can declare a cash dividend. Declaring a dividend creates a liability for a corporation, meaning the company has an obligation to pay its shareholders as of the date of dividend declaration.

Step 1

Enter the month and day when the board of directors authorizes the dividend. Declaring dividends does not mean the company is paying on that particular day. When a corporation declares dividends it sets the stage for making dividend payments to shareholders at a later date, usually within the same month of declaration.

Step 2

Debit the retained earnings account for the applicable amount. Let's assume a company issued a $.50 per share dividend on 150,000 shares. Multiply $.50 times 150,000 shares, which equals $75,000. In this scenario, debit the retained earnings for $75,000, since this is the amount decreased from shareholders' equity.

Step 3

Credit the dividends payable account. This illustrates an increase in liability, since the company has an obligation to pay its shareholders when the board authorizes dividends. If a company debits retained earnings for $75,000, the credit to dividends payable must be $75,000, since debits and credits must always equal.

                   

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About the Author

Christopher Carter loves writing business, health and sports articles. He enjoys finding ways to communicate important information in a meaningful way to others. Carter earned his Bachelor of Science in accounting from Eastern Illinois University.

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