Cash Dividends

The decision to pay cash dividends rests with the board of directors and involves more than evaluating the amounts of retained earnings and cash. The directors, for instance, may decide to keep the cash to invest in the corporation’s growth, to meet emergencies, to take advantage of unexpected opportunities, or to pay off debt. Alternatively, many corporations pay cash dividends to their stockholders at regular dates. These cash flows provide a return to investors and almost always affect the stock’s market value.

Accounting for Cash Dividends
Dividend payment involves three important dates: declaration, record, and payment. Date of declaration Date the directors vote to pay a dividend. is the date the directors vote to declare and pay a dividend. This creates a legal liability of the corporation to its stockholders. Date of recordDate directors specify for identifying stockholders to receive dividends. is the future date specified by the directors for identifying those stockholders listed in the corporation’s records to receive dividends. The date of record usually follows the date of declaration by at least two weeks. Persons who own stock on the date of record receive dividends.  

Date of payment 
Date the corporation makes the dividend payment. is the date when the corporation makes payment; it follows the date of record by enough time to allow the corporation to arrange checks, money transfers, or other means to pay dividends.



To illustrate, the entry to record a January 9 declaration of a $1 per share cash dividend by the directors of Z-Tech, Inc., with 5,000 outstanding shares is



¹ An alternative entry is to debit Dividends instead of Retained Earnings. The balance in Dividends is then closed to Retained Earnings at the end of the reporting period. The effect is the same: Retained Earnings is decreased and a Dividend Payable is increased. For simplicity, all assignments in this chapter use the Retained Earnings account to record dividend declarations.

Common Dividend Payable is a current liability. The date of record for the Z-Tech dividend is January 22. No formal journal entry is needed on the date of record. The February 1 date of payment requires an entry to record both the settlement of the liability and the reduction of the cash balance, as follows:



Deficits and Cash Dividends
A corporation with a debit (abnormal) balance for retained earnings is said to have a retained earnings deficitDebit (abnormal) balance in Retained Earnings; occurs when cumulative losses and dividends exceed cumulative income; also called accumulated deficit., which arises when a company incurs cumulative losses and/or pays more dividends than total earnings from current and prior years. A deficit is reported as a deduction on the balance sheet, as shown in Exhibit 13.6. Most states prohibit a corporation with a deficit from paying a cash dividend to its stockholders. This legal restriction is designed to protect creditors by preventing distribution of assets to stockholders when the company may be in financial difficulty.

Point: It is often said a dividend is a distribution of retained earnings, but it is more precise to describe a dividend as a distribution of assets to satisfy stockholder claims.
Point: The Retained Earnings Deficit account is also called Accumulated Deficit.

EXHIBIT 13.6 Stockholders’ Equity with a Deficit

Some state laws allow cash dividends to be paid by returning a portion of the capital contributed by stockholders. This type of dividend is called a liquidating cash dividendDistribution of assets that returns part of the original investment to stockholders; deducted from contributed capital accounts., or simply liquidating dividend, because it returns a part of the original investment back to the stockholders. This requires a debit entry to one of the contributed capital accounts instead of Retained Earnings at the declaration date.

Point: Amazon.com has never declared a cash dividend.