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What Is the Effect of a Stock Dividend Declared and Issued Vs. a Cash Dividend Declared and Paid?

Original post by Kathy Adams McIntosh of Demand Media

Corporations receive money from investors in exchange for partial ownership of the company. Investors expect the value of their investment to increase either through an increase in the value of the stock or through the receipt of dividends. If a company decides to declare a dividend, it chooses between issuing stock dividends or paying cash dividends. Each type of dividend impacts the company's financial accounts differently.

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Stock Dividend Definition

A stock dividend takes the form of additional shares of stock provided to stockholders at no additional cost. The board of directors decides when to declare a stock dividend. Stock dividends are classified as small or large stock dividends. A small stock dividend occurs when the additional shares of stock equal less than 25 percent of the current stock outstanding. A large stock dividend occurs when the additional shares equal more than 25 percent of the current stock outstanding. The date of the meeting represents the date of declaration. The date when the company issues the stock is the date of distribution.

Small Stock Dividend Effect

When the company declares a small stock dividend, it records the declaration in the financial records at the current market value of the stock. The company increases an account called Common Stock Dividend Distributable for the par value of the shares being issued. It increases an account called Paid in Capital for the market value of the stock above the par value. It decreases the Retained Earnings account for the total market value of the stock. On the date of distribution, the company increases the Common Stock account and decreases the Common Stock Dividend Distributable for the par value of the stock.

Large Stock Dividend Effect

When the company declares a large stock dividend, it records the declaration in the financial records at the par value of the stock. The company increases Common Stock Dividend Distributable and decreases Retained Earnings for the par value of the shares being issued. On the date of distribution, the company increases the Common Stock account and decreases the Common Stock Dividend Distributable for the par value of the stock.

Cash Dividend Definition

A cash dividend represents a financial payout to the investors. The board of directors also decides when to declare a cash dividend. The date of the meeting represents the date of declaration. The date when the company pays the dividend is the date of payment.

Cash Dividend Effect

On the date of declaration, the company increases an account called Dividends Payable and decreases Retained Earnings for the amount of the dividend. On the date of payment, the company decreases Dividends Payable and decreases Cash.


                   

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About the Author

Kathy Adams McIntosh started writing professionally in 2001. She has been published in "Cup of Comfort," "Community Connection" and "Wisconsin Christian News." Adams McIntosh belongs to the Fearless Freelancers and the Broadway Writers Guild. She earned her Master of Business Administration from the University of Wisconsin.


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