Definition of Dividend
Generally, the term dividend refers to a cash dividend, which is distribution of a portion of a corporation’s earnings to its stockholders in the form of cash. The cash dividend reduces the corporation’s current asset account Cash and reduces the corporation’s stockholders’ equity account Retained Earnings.
Some corporations will declare a stock dividend instead of (or in addition to) a cash dividend. A stock dividend distributes additional shares of the corporation’s stock to its existing stockholders. The effect of a stock dividend is to reduce Retained Earnings and to increase the corporation’s Paid-in Capital. Therefore, the total amount of stockholders’ equity and the total amount of assets are unchanged.
Occasionally, a corporation will distribute assets other than cash. This is described as a property dividend. It will reduce the corporation’s assets and the stockholders’ equity account Retained Earnings.
Examples of Dividends
Jones Corporation has 100,000 shares of common stock outstanding. Each quarter, the board of directors declares a $1 dividend per share of common stock. This results in a debit of $100,000 to Retained Earnings and a credit of $100,000 to Cash.
Next month, Jones Corporation will be declaring a 10% stock dividend. This means that the corporation will distribute 10,000 (100,000 shares X 10%) new shares of common stock to its stockholders. If the market price of a share of common stock will be $25, the entry to record the stock dividend will be a debit of $250,000 to Retained Earnings and a credit to a paid-in capital account such as Common Stock.
It is important to note that dividends are not expenses and therefore are not reported on the corporation’s income statement.
