Equity: Q6

Q6: How do we account for a company declaring a dividend?

A:

To recognise the declaration of a dividend the amount of the dividend is transferred from Retained earnings (equity) to Dividends payable (liability):

                DR   Retained Earnings                                  $85m

                                CR   Dividends Payable                                  $85m

Directors declare a dividend: reduces equity (DR) and increases a liability (CR)

Retained earnings is an item of equity. By debiting Retained earnings we reduce it. Dividends payable is a transfer of value from a firm to its equity investors and is characterised as a current liability.  This liability is created when the directors of a company declare a dividend and so commit the company to pay this dividend in the future.

video

Also, see Martin’s videos Accounting for Declaring a Dividend

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