A distribution by a corporation to its stockholders, on a PER SHARE basis, out of its earnings. Per share means every share of a class receives the same amount — the dividend cares how many shares you hold, not who you are.

The five forms a dividend can take?

Cash, stock (the company's own shares), property (something the company owns), scrip (a written promise to pay later) and liquidating. Cash and stock are the two you get examined on; cash is the only one that empties a bank account.

The three conditions for paying a cash dividend?

(1) A credit balance in Retained Earnings to distribute from; (2) adequate CASH — retained earnings is not a bank account; (3) a DECLARATION by the board of directors. Retained earnings says whether the company may; cash says whether it can.

Why do dividends never accrue?

Interest grows on its own with the passage of time; a dividend gets switched on. No obligation exists until the board votes, so no adjusting entry is ever made for an undeclared dividend and nothing appears in the accounts before declaration.

The three dividend dates and what each does?

Declaration date CREATES the obligation (and carries an entry). Record date IDENTIFIES who will be paid (no entry — a determination is not a transaction). Payment date SETTLES it (cash goes out).

Entry on the declaration date?

Dr Cash Dividends / Cr Dividends Payable, for the total declared. The company is worse off on the day it decides, not the day it pays.

Entry on the record date?

None. The company reads its own list of stockholders; the liability recognized on declaration is unchanged and nothing has moved.

Entry on the payment date?

Dr Dividends Payable / Cr Cash. Assets down, liabilities down, equity untouched — the equity damage was done on the declaration date.

Is Cash Dividends an expense?

No. It is a stockholders' equity account, a CONTRA to Retained Earnings, used so a year's distributions can be counted on their own. A dividend is not a cost of earning revenue; it divides what was already earned.

How is Cash Dividends closed?

Dr Retained Earnings / Cr Cash Dividends at year-end. NEVER to Income Summary — it never touched net income, and running it through the income statement would understate profit by a distribution the owners voted.

How is a cash dividend computed?

Rate per share × shares OUTSTANDING. Never issued, never authorized — treasury shares receive nothing.

What is the ex-dividend date?

The date set by the exchange, one business day before the record date. Buy on or after it and the dividend is not yours — the seller keeps it. The ex-dividend date, not the record date, decides who is paid.

Why does the share price drop on the ex-dividend morning?

Because the buyer no longer receives the dividend, so the share opens lower by roughly the dividend amount. Nothing was destroyed; something was handed to somebody else.

What is a liquidating dividend?

A dividend declared out of PAID-IN CAPITAL rather than earnings — a return OF capital rather than a return ON capital. It is debited to additional paid-in capital, never to Retained Earnings, because retained earnings is not where it came from.

What is the preference of preferred stock?

The right to receive dividends before common stockholders do. It is a rule about the queue once a dividend exists — not a guarantee that one will ever be declared, because the board still has to vote.

How is the preferred dividend computed?

Rate × par × preferred shares. It is fixed, so it can be computed before anybody votes — a 6%, $50 par share earns $3 a year.

What does cumulative mean?

A dividend the board passes is not lost: the entitlement carries forward as a DIVIDEND IN ARREARS and must be paid in full before common stockholders receive anything.

Are dividends in arrears recorded?

No — disclosed, never recorded. No obligation exists until the board declares, so nothing goes on the balance sheet. They appear in the notes, because a lender has to know what stands in front of the common.

The order of the dividend queue?

(1) Read the terms: cumulative or not. (2) If cumulative, the arrears — in full. (3) The preferred's current-year entitlement. (4) The common take the residual. First the past, then the present, then everyone else.

What happens if the preferred is NOT cumulative?

A passed dividend is simply gone. There are no arrears to settle, so the preferred take only the current year and everything else belongs to the common.

What is a stock dividend?

A pro rata distribution of a corporation's own shares to its own stockholders. No asset leaves the business and no liability is created — the corporation hands out paper it can print.

Three reasons a board declares a stock dividend?

To satisfy stockholders expecting a dividend in a year the board would rather keep the cash; to increase the marketability of the stock by pushing the price per share into a range more buyers can reach; and to signal that a slice of equity is permanent capital that will never be paid out.

Does a stock dividend change your ownership percentage?

No. Every holder on the register is enlarged by the same percentage on the same day, so whatever fraction you held before, you hold afterwards. Which is exactly why the market price per share falls when the new shares arrive.

Small vs large stock dividend?

SMALL is less than 20–25% of the issued shares and is recorded at FAIR MARKET VALUE on the declaration date. LARGE is more than 20–25% and is recorded at PAR (or stated value), with market price ignored — a large one behaves like a split.

The declaration entry for a SMALL stock dividend?

Dr Stock Dividends (new shares × MARKET price); Cr Common Stock Dividends Distributable (new shares × PAR); Cr Paid-in Capital in Excess of Par (the plug). Earned capital is reclassified as contributed capital.

The declaration entry for a LARGE stock dividend?

The same shape, booked at PAR: Dr Stock Dividends (new shares × par); Cr Common Stock Dividends Distributable (new shares × par). Market price is ignored, so there is no excess.

Is Common Stock Dividends Distributable a liability?

No — it is a STOCKHOLDERS' EQUITY account, reported under contributed capital directly beneath Common Stock. The test: a liability is settled with assets, and no asset will ever settle this one. It is settled by printing shares.

The entry when the stock dividend shares are issued?

Dr Common Stock Dividends Distributable / Cr Common Stock — PAR ONLY. The excess credited on declaration is never moved again, and no cash appears on either date.

What does a stock dividend do to total stockholders' equity?

Nothing. Retained earnings falls and paid-in capital rises by the identical amount. A stock dividend changes the COMPOSITION of stockholders' equity, not the SIZE of it.

What does a stock dividend do to par value per share and total assets?

Neither moves. Par per share is unchanged, total assets are unchanged because no asset moved, and the only row anybody outside accounting would notice is shares outstanding, which rises.

What is a stock split?

Every holder receives a multiple of the shares held — 2-for-1 doubles the count — and the par value per share is divided by the same factor, because the legal capital of the company cannot change.

The journal entry for a stock split?

There is none. A MEMORANDUM entry notes the new share count and the new par value. An entry exists to change a balance, and a split changes no balance: paid-in capital, retained earnings, total equity and total par are all exactly where they were.

What is a reverse stock split?

The same mechanism pointed the other way: a 1-for-6 reverse exchanges six old shares for one new one, so the count falls by six and the par per share rises by six. Total par is unchanged, a memorandum is the only record, and AUTHORIZED shares are not affected.

Why would a board declare a reverse split?

Price per share moves inversely with the count, so cutting the shares lifts the market price — usually to climb back over an exchange's listing minimum. The investor's total market value is unchanged; a change in the denominator enriches nobody.

What is retained earnings?

Net income the corporation has retained rather than distributed — and, in full, part of the stockholders' claim on TOTAL ASSETS. It tells you how much of the assets the owners have a claim on, and nothing whatsoever about which assets those are. A scoreboard, not a wallet.

What moves retained earnings up and down?

UP: net income (through Income Summary) and a prior period adjustment correcting an understatement. DOWN: a net loss, cash dividends, stock dividends and a prior period adjustment correcting an overstatement. Only one of the four debits ever moves cash.

A DEBIT balance in Retained Earnings, left when losses run the account through zero. It is reported in the stockholders' equity section as a deduction. A net loss is never, under any circumstances, debited to paid-in capital — that is what the owners put in, not what the business earned.

The three kinds of retained earnings restriction?

LEGAL (many states restrict retained earnings by the cost of treasury stock held), CONTRACTUAL (a lender requires it stay in the business while the debt is outstanding) and VOLUNTARY (the board sets it aside for a planned purpose). All three are DISCLOSED IN THE NOTES — no entry, and the ledger balance never moves.

What is a prior period adjustment?

The correction of an error in a prior year's net income. It goes straight to Retained Earnings — because the prior year's income is already inside that account — and it never touches the current year's income statement. Depreciation understated last year: Dr Retained Earnings / Cr Accumulated Depreciation.

The retained earnings statement, line by line?

Balance January 1 as reported; less (or plus) the prior period adjustment; balance January 1 AS ADJUSTED; add net income; less cash dividends and stock dividends; balance December 31. Detail goes in the inner column, running totals in the outer one, and the final figure is double-ruled.

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Accounting 2 · Chapter 14 · Free

Chapter 14 — Corporations: Dividends, Retained Earnings & Income Reporting

How corporations return value to shareholders — the retained earnings statement, cash and stock dividends, stock splits, and why each one moves equity differently.

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What you'll learn

Record cash dividends at declaration, record, and payment dates
Explain how stock dividends and stock splits change equity — and why total value doesn't move
Distinguish the accounting treatment of small vs large stock dividends
Build the retained earnings statement and record prior period adjustments

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Part 1 — Cash Dividends Explained: The Three Dates & Every Journal Entry

Part 2 — Stock Dividends vs Stock Splits Explained

Part 3 — Retained Earnings Explained: The Statement, Step by Step

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Chapter 14 — Corporations: Dividends, Retained Earnings & Income Reporting

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