10/21/21, 10:51 AM How Do Dividends Affect the Balance Sheet?

CORPORATE FINANCE & ACCOUNTING

FINANCIAL STATEMENTS

How Do Dividends Affect the Balance Sheet?

By
ANDRIY BLOKHIN

Reviewed by
AMY DRURY
on April 30, 2021

What Are Dividends?

A dividend is a method of redistributing a company's profits to shareholders as a reward for
their investment. Companies are not required to issue dividends on common shares of stock,
though many pride themselves on paying consistent or constantly increasing dividends each
year. When a company issues a dividend to its shareholders, the dividend can be paid either
in cash or by issuing additional shares of stock. The two types of dividends affect a
company's balance sheet in different ways.

KEY TAKEAWAYS:
Companies issue dividends to reward shareholders for their investment.
Dividends paid can be in the form of cash or additional shares called stock
dividends.
Cash dividends affect the cash and shareholder equity on the balance sheet;
retained earnings and cash are reduced by the total value of the dividend.
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10/21/21, 10:51 AM How Do Dividends Affect the Balance Sheet?

Stock dividends have no impact on the cash position of a company and only impact
the shareholders equity section of the balance sheet. 

Understanding Dividends
When most people think of dividends, they think of cash dividends. However, companies can
also issue stock dividends. When a company issues a stock dividend, it distributes additional
quantities of stock to existing shareholders according to the number of shares they already
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own. Dividends impact the shareholders' equity section of the corporate balance sheet—the
retained earnings, in particular.

Retained Earnings on the Balance Sheet Advertisement

Retained earnings are the amount of money a company has left over after all of its
obligations have been paid. Retained earnings are typically used for reinvesting in the
company, paying dividends, or paying down debt. While net profit is the amount of income
that remains after accounting for the cost of doing business in a given period, retained
earnings are the amount of income accrued over the years that has not been reinvested in
the business or distributed to shareholders.

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Cash Dividends on the Balance Sheet

Cash dividends affect two areas on the balance sheet: the cash and shareholders'
equity accounts. Investors will not find a separate balance sheet account for dividends that
have been paid. However, after the dividend declaration and before the actual payment, the
company records a liability to its shareholders in the dividend payable account.

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After the dividends are paid, the dividend payable is reversed and is no longer present on the
liability side of the balance sheet. When the dividends are paid, the effect on the balance
sheet is a decrease in the company's retained earnings and its cash balance. In other words,
retained earnings and cash are reduced by the total value of the dividend.

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10/21/21, 10:51 AM How Do Dividends Affect the Balance Sheet?

By the time a company's financial statements have been released, the dividend is already
paid, and the decrease in retained earnings and cash are already recorded. In other words,
investors will not see the liability account entries in the dividend payable account. 

For example, assume a company has $1 million in retained earnings and issues a 50-cent
dividend on all 500,000 outstanding shares. The total value of the dividend is $0.50 x 500,000,
or $250,000, to be paid to shareholders. As a result, both cash and retained earnings
are reduced by $250,000 leaving $750,000 remaining in retained earnings.

The ultimate effect of cash dividends on the company's balance sheet is a reduction in cash
for $250,000 on the asset side, and a reduction in retained earnings for $250,000 on the
equity side.

Stock Dividends on the Balance Sheet

While cash dividends have a straightforward effect on the balance sheet, the issuance of
stock dividends is slightly more complicated. A company's executive management
might want to issue stock dividends to its shareholders if the company lacks excess cash on
hand or if they want to decrease the value of existing shares, driving down the price-to-
earnings ratio (P/E ratio) and other financial metrics. Stock dividends are sometimes referred
to as bonus shares or a bonus issue.

Stock dividends have no impact on the cash position of a company and only impact the
shareholders' equity section of the balance sheet. If the number of shares outstanding is
increased by less than 20% to 25%, the stock dividend is considered to be small. A large
dividend is when the stock dividend impacts the share price significantly and is typically
an increase in shares outstanding by more than 20% to 25%. A large dividend can often be
considered a stock split. 
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When a stock dividend is declared, the total amount to be debited from retained earnings is
calculated by multiplying the current market price per share by the dividend percentage and
by the number of shares outstanding. If a company pays stock dividends, the dividends
reduce the company's retained earnings and increase the common stock account. Stock
dividends do not result in asset changes to the balance sheet but rather affect only the
equity side by reallocating part of the retained earnings to the common stock account.

For example, say a company has 100,000 shares outstanding and wants to issue a 10%
dividend in the form of stock. If each share is currently worth $20 on the market, the total
value of the dividend would equal $200,000. The two entries would include a $200,000
debit to retained earnings and a $200,000 credit to the common stock account. The balance
sheet would be balanced following the entries.

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Related Terms
What Is a Stock Dividend?
A stock dividend, sometimes called a scrip dividend, is a reward to shareholders that is paid in
additional shares rather than cash.
more
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10/21/21, 10:51 AM How Do Dividends Affect the Balance Sheet?

Treasury Stock (Treasury Shares) Definition

Treasury stock is previously outstanding stock bought back from stockholders by the issuing
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Retained Earnings Definition

Retained earnings are a firm's cumulative net earnings or profit after accounting for dividends.
They're also referred to as the earnings surplus.
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Additional Paid-In Capital (APIC)

Additional paid-in capital is the excess amount paid by an investor above the par value price of a stock
during an initial public offering (IPO).
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What Is the Accounting Equation?

The accounting equation defines a company's total assets as the sum of its liabilities and
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How Share Repurchases Can Raise the Price of a Company's Stock

A share repurchase is when a company buys back its own shares from the marketplace, which
increases the demand for the shares and the price.
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