CASH DIVIDENDS

To become a shareholder, one needs to buy stock or shares in a company.

When a company earns a profit, it may able to pay back its shareholders by
payment of dividends. Majority of corporations does distribution of dividends
through payment of cash. Cash dividends are from corporation's unrestricted
retained earnings which are declared by the board of directors to be paid as
dividends to the shareholders in return to their investments done in the company.

But dividends are almost never guaranteed as for payment of small, large, or
no dividend at all for the shareholders. Firms in their growth stage tend to fail in
paying regular annual cash dividends as compared to well-established and matured
firms as they are more focused on re-investing the cash for the growth of the
business.

Usually, cash dividends are paid on a per-share basis. So, if such investor has
more shares, he’ll tend to receive a greater yield. When a corporation declares a
cash dividend, it debits its Retained Earnings and credits a liability account called
Cash Dividends Payable. And once the cash dividends are issued to shareholders,
Cash Dividends Payable is debited and Cash is credited.

Illustration: Toy Story Corporation declared cash dividends of P10 per share of
ordinary shares. The firm has 55,000 ordinary shares issued and outstanding.

Entries for declaration of dividend:

Retained Earnings P550,000

Cash Dividends Payable P550,000

To record declaration of dividend.

Entries for payment of dividend:

Cash Dividends Payable P550,000

Cash P550,000

To record payment of dividend.

 Cash dividends reduce the total assets and total shareholders’ equity.