Cash dividends offer a way for companies to return capital to shareholders. A cash dividend primarily impacts the cash and shareholder equity accounts. There is no separate balance sheet account for dividends after they are paid. However, after the dividend declaration but before actual payment, the company records a liability to shareholders in the dividends payable account.
Key Takeaways
- Cash dividends affect the cash and shareholder equity accounts on the balance sheet.
- The dividends payable account is used for the time between when dividends are declared and when the actual payments are made.
- After cash dividend payments are made there are no separate dividend or dividend-related accounts left on the balance sheet.
- Meanwhile, stock dividends do not impact a company’s cash position—only the shareholder equity section of the balance sheet.
Cash Dividend Payments
After declared dividends are paid, the dividend payable is reversed and no longer appears on the liability side of the balance sheet. When dividends are paid, the impact on the balance sheet is a decrease in the company's dividends payable and cash balance.
As a result, the balance sheet size is reduced. If the company has paid the dividend by year-end then there will be no dividend payable liability listed on the balance sheet.
Investors can view the total amount of dividends paid for the reporting period in the financing section of the statement of cash flows. The cash flow statement shows how much cash is entering or leaving a company. In the case of dividends paid, it would be listed as a use of cash for the period.
Cash Dividend vs. Stock Dividend
In addition to cash dividends, companies can also pay stock dividends. This type of dividends increases the number of shares outstanding by giving new shares to shareholders. Instead of reducing cash, stock dividends increase the number of shares.
How a stock dividend affects the balance sheet is a bit more involved than cash dividends, although it only involves shareholder equity. When a stock dividend is declared, the amount to be debited is calculated by multiplying the current stock price by shares outstanding by the dividend percentage.
When paid, the stock dividend amount reduces retained earnings and increases the common stock account. Stock dividends do not change the asset side of the balance sheet—only reallocates retained earnings to common stock.
Cash dividends can be made via electronic transfer or check. When a cash dividend is paid, the stock price generally drops by the amount of the dividend. For example, a company that pays a 2% cash dividend, should experience a 2% decline in the price of its stock.
Large stock dividends, of more than 20% or 25%, could also be considered to be effectively a stock split.
Cash Dividend Example
Consider a company with two million common shares that declares a cash dividend of $0.25 per share. At the time of the dividend declaration, the company records a $500,000 debit to its retained earnings account and a credit to the dividends payable account for the same amount.
After the company pays the dividend to shareholders, the dividends payable account is reversed and debited for $500,000. The cash and cash equivalent account is also reduced for the same amount through a credit entry of $500,000.
After cash dividends are paid, the company's balance sheet does not have any accounts associated with dividends. However, the company's balance sheet size is reduced, as its assets and equity are reduced by $500,000.
