5. Cash Dividends

Let's talk about cash dividends. In case you don't already know, dividends is money paid by a company to stockholders, and some stocks declare and pay dividends more often than others, and some never declare and pay dividends at all. It's definitely not required. Here, we're gonna concern ourselves with what happens when a company declares and pays a dividend. There are three important dates you need to remember. The first is the date of declaration. This is when the company says, "Hey, we're going to pay you." You can basically think of this as the date of announcement. When a company comes out and says, "We're going to pay a dividend," that is the date of declaration.

Then at some point in the future... Let's draw a little timeline here. At some point in the future, they're going to pay. This would be the date of payment. We've got two dates. We've got the date of declaration where the company says, "Hey, we're going to pay." They announce the fact that they are going to pay this cash dividend. We have the date of payment where the company says, "Okay, now we are going to pay it." But here in the middle, we have this third date, and this date is called the date of record. Now, the date of record you can kind of think of as the cutoff date.

You will only get paid if you hold the stock on the date of record. And the company will tell you this date of record when they announce that they're going to have the dividend. So you'll see something like this. On November 1, the board declares a $1 per share dividend to shareholders of record on November 30. The dividend is payable December 15. They have 100,000 shares of common stock issued and 20,000 in the treasury. Okay, let's take a look back at this. On November 1, the board declares a dividend. That puts November 1 as the date of declaration. On November 1, they told everyone, "Hey, we're gonna have a dividend.

This is our announcement. We are declaring it right now." So they declare a $1 a share dividend to shareholders of record on November 30. That means that if you own the stock on November 30, then you are entitled to that dividend. If you own it on November 30, they'll put your name on a list, and you will get the dividend.

Now, if you own it in here, you don't get the dividend. If you own it in here, you don't get the dividend. You have to own it at this point in time to get the dividend. That is when they record who gets the dividend. Then on December 15, they're going to pay it. So that puts that as December 15. Now, what's this extra information here about 100,000 shares of common stock issued, 20,000 shares of treasury? Now, if you'll remember, we did something like this. We said you are authorized to sell a certain amount of shares. You can then issue some amount, or all if you wanted, of those shares.

Of those shares, you may have some portion that are still outstanding and some portion that are treasury stock. So what did this problem give us? It said 100,000 issued. Okay, well, that means this line up here is 100,000, and this line here is 20,000, which makes the outstanding shares 80,000 because we've issued 100,000, of which 20 are treasury stock. So that means that the rest over here, this is all outstanding. And the reason that this 80 is important is because we don't pay ourselves a dividend. That would be like taking cash out of one pocket and putting it in the other.

It just doesn't make sense. It doesn't do anything. So when you see 100,000 common stock issued, 20,000 treasury, what you're looking for is the number outstanding, and you haven't been given the number outstanding. You've been given the number issued. So you need to be able to determine for yourself what the number of outstanding shares is. And remember, outstanding plus treasury equals issued. So if you're given issued, then obviously you do issued minus treasury equals outstanding.

Pay careful attention to this because if you calculate the dividend based on 100,000, you're going to get it wrong on the test. Okay, back to the good stuff. Now we know the three dates. We know they declared it on the 1st, the date of record on the 30th, and the date of payment on the 15th. Now we have to do a couple of journal entries. When the board declares a dividend, what are they actually doing? They're saying, "We are going to pay a dividend. We promise to pay a dividend." That means that they are, on November 1, promising in the future to pay money.

What does that sound like to you? Does that sound like a probable future economic sacrifice? If they say, "In the future, I will pay you money," that sounds like a probable future economic sacrifice to me. That means it's a liability. So on November 1 here, we have to record some sort of liability. We have to record a dividend payable because now we are obligated to pay it.

So what we're gonna do is we're gonna say we've got 80,000 shares outstanding. We've decided to pay a $1 per share dividend, and this math is easy. It's 80,000. Okay, so we have to record an $80,000 dividend payable. I'm gonna start there. I'm gonna start by putting this credit, dividend payable, at $80,000. And the reason I started with the credit is because I know that liabilities are credited. That one is, I mean, that one's like all the way back to Chapter 1. It's a payable, which means it must be credited to be increased. The corresponding debit on this one is one we might not know.

It's just dividends declared. And that's 80,000. You may see this as just dividends and not dividends declared. Either way, it's the same thing. This is the dividends account when we say you debit expenses, assets, and dividends. That's the account we're talking about. And you can see that we debited it just like this old acronym tells us. It doesn't really matter if it's dividends or dividends declared, whatever your professor prefers. This is our entry when the dividend is declared. When we say we're going to pay the dividend, we record that promise as a liability. Let's take a look at this second date, November 30. On November 30, all we're doing is recording who owns stock so that we can pay them on December 15.

So on November 30, there's no journal entry required. Moving on to December 15, we actually pay the dividend. This one is easy because we know that the dividend payable has to go away. So we have to reduce the dividend payable, and whenever you pay something, your cash is decreased, and so your cash goes down. And you know that I love to make it as easy as possible. So here's what I wanna postulate. I wanna say that the only thing you have to remember is this right here. Everything else you can figure out with very little effort. Let's walk through it again. If we say that on November 1, a company promises to pay something, you have just defined a liability, a promise to pay something.

So when you say on November 1, we promise to pay a dividend, you make this account, the dividend payable. You are able to pay this dividend now, and you increase your liability by putting it in a credit. So that one you don't have to remember. That one you can just figure out. The company promises to pay something. Promises to pay are liabilities. I'm promising to pay a dividend. It's a dividend payable. Problem solved. Now jumping down here, when you pay off a liability, the liability decreases. So you don't have to remember that one. You can figure that out. And when you pay something, your cash decreases.

So you don't have to remember that one. You can figure that out. This dividends is really the only one you may have to remember. You could have come up with these three entries without having studied this chapter at all. But in this chapter, you learned that when you declare the dividend, you put it into the dividends declared account or just the dividends account. I think the one trick to look out for is make sure you're watching these numbers here. Make sure that you are paying dividends on outstanding shares, not on issued, and definitely not on authorized. So if you have to draw this out to the side, do it.

That's great. Then from there, you can use all your old accounting knowledge to come up with these journal entries.