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how the company paid dividend to the shareholders ???

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Jun 6 '19 at 10:25:11

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On the date that the board of directors decides to pay a dividend, it will determine the amount to pay and the date on which payment will be made. At this point the dividend is said to have been declared.

As the business does not have to pay a dividend, there is no liability until there is a dividend declared. As soon as the dividend has been declared, the liability needs to be recorded in the books of account as a dividend payable.

Suppose a business had declared a dividend on the dividend declaration date of 0.60 per share on 150,000 shares. The total dividend liability is now 90,000, and the journal to record the declaration of dividend and the dividend payable would be as follows.

Dividends Declared – Dividend Payable

Account Debit Credit

Dividends 90,000

Dividend Payable 90,000

Total 90,000 90,000

The debit to the dividends account is not an expense, it is not included in the income statement, and does not affect the net income of the business. The dividends account is a temporary equity account in the balance sheet. The balance on the dividends account is transferred to the retained earnings, it is a distribution of retained earnings to the shareholders not an expense.

The credit entry to dividends payable represents a balance sheet liability. At the date of declaration, the business now has a liability to the shareholders to be settled at a later date.

Dividend Payments

At the same time as the dividend is declared, the business will have decided on the date the dividend will be paid, the dividend payment date.

On the payment date, the following journal will be entered to record the payment to shareholders.

Dividend Payment

Account Debit Credit

Dividends Payable 90,000

Cash 90,000

Total 90,000 90,000

On the dividend payment date, the cash is paid out to shareholders to settle the liability to them, and the the dividends payable account balance returns to zero.

The important points to remember when accounting for a dividend are that the liability of the business to the shareholders is established as soon as the dividend is declared, and that dividends are a distribution of the profits of a business to the shareholders and are not an expense.
Jun 6 '19 at 10:45:8
7 months ago
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