Journal Entry for Cash Dividend: A Guide to Recording Dividend Payments

Dividends are a type of payment made to shareholders by a business, and are usually either in the form of cash or additional shares of stock.

Recording dividend payments accurately in the accounting journal is crucial for keeping accurate financial records and complying with accounting regulations and standards.

This is a fundamental aspect of bookkeeping and accounting, and understanding the debits and credits involved is vital as an accountant.

Key Dividend Dates

Before we look into how to record a journal entry for a cash dividend, it is important that we understand the key dividend dates, and the order in which they occur:

Declaration Date	The declaration date is the date on which the board of directors announces and approves the payment of a dividend. The declaration includes the amount of the dividend being issued, and states the record date and payment date.
Ex-Date	The ex-dividend date is the date by which shareholders need to own the stock in order to receive the upcoming dividend payment. If shares are purchased on or after this date, they won’t be eligible for the upcoming dividend payment.
Record Date	The record date, which is set by a company’s board of directors, is the date on which the company compiles a list of shareholders of the stock for which it has declared a dividend. This list is used to determine which shareholders are entitled to receive the dividend.
Payment Date	Simply put, the payment date is the date on which the dividend is paid to shareholders.

Ledger Accounts Used for Cash Dividend Journal Entry

When a business pays a cash dividend, there are three accounts involved:

The Retained Earnings Account
The Dividend Payable Account
The Cash Account

Retained Earnings Account	Debit	Equity	Debits decrease the equity value
Dividend Payable Account	Credit/Debit	Liability	Credits increase the liability value. Debits decrease the liability value.
Cash Account	Credit	Asset	Credits decrease the asset value

Using the DEAD CLIC mnemonic to understand the debits and credits:

The Retained Earnings Account is a type of equity and are therefore reported in the shareholders’ equity section of the balance sheet. As the profits of a business belong to the owners, retained earnings increase the amount of equity the owners have in the business.

The Dividend Payable Account is a liability, as it is a financial obligation between two parties that hasn’t yet been fulfilled or paid in full. The two parties in this example would be the company and the shareholders.

The Cash Account in an asset, as again, it contains economic value and/or future benefit

Example of Journal Entry for Cash Dividend

Let’s take a look at an example of a journal entry for a cash dividend, from the declaration date through to the payment date:

Step 1: Journal Entry for Declaration of a Cash Dividend

A business declares a dividend of £1.50 per share, and has 1,000,000 shares in circulation. The journal entry to record this would be:

Retained Earnings Account	Debit	£1,500,000
Dividends Paid Account	Credit	£1,500,000

No cash has been paid to shareholders yet, as all that has happened is the company has declared a dividend will be paid in the future. Therefore, the only accounts involved are the Retained Earnings Account, and the Dividends Paid Account.

We would debit the Retained Earnings Account to reduce the equity, and credit the Dividends Paid Account to increase the liability.

This means that even though no cash has been paid out, the equity part of the balance sheet lessens.

Step 2: Journal Entry for Payment of a Cash Dividend

We are now at the point in time where the company will physically pay the shareholders the cash dividend. The journal entry to record this would be:

Cash Account	Credit	£1,500,000
Dividends Paid Account	Debit	£1,500,000

The cash has been paid to the shareholders – in other words, our bank account has decreased. As the cash account is an asset, we would decrease this by crediting that account.

As the dividend has now been paid, we need to clear the £1,500,000 credit that was posted on the declaration date, as it isn’t due anymore.

As the Dividends Paid Account is a liability, we would decrease that liability by posting a debit for £1,500,000 – this effectively offsets the initial journal entry in the Dividends Paid Account.

This means that the Dividends Paid Account will now be showing a zero balance until the next dividend is declared.

After posting both journals for the declaration and payment of a cash dividend, the net effect reduces cash and reduces equity on the balance sheet, so there is no income statement impact.

However, the payment will also show on the statement of cash flows, under ‘cash flow from financing activities.