Shareholder Distribution Journal Entry
Introduction
In business, the company may need to distribute earnings in form of the dividend to the shareholders two or four times a year. Likewise, it needs to make to shareholder distribution journal entry by recording the dividend declaration as well as the dividend payment.
The dividend declaration entry is made after the board of directors has approved the dividend distribution. Afterward, the dividend payment entry is made when the company pays the cash dividend to the shareholders.
Likewise, the shareholder distribution journal entry usually includes both of these two entries. This is due to, sometimes, the date of dividend declared and the date of dividend paid are in the different accounting periods. Hence, not making the shareholder distribution journal entry on the date of the dividend declaration and making only one journal entry on the dividend payment date may overstate the total equity on the balance sheet.
The company usually makes the shareholder distribution by paying the cash dividend from the retained earnings. Likewise, the shareholder distribution will usually reduce both cash and retained earnings that it has on the balance sheet.
Shareholder distribution journal entry
Dividend declared
As mentioned, the company should make the journal entry for shareholder distribution after the board of directors has approved the dividend to be paid to the shareholders. Hence, the first journal entry for shareholder distribution is on the dividend declaration date.
Likewise, the company can make the journal entry for shareholder distribution on the dividend declaration date by debiting the dividends declared account and crediting the dividends payable account.
| Account | Debit | Credit |
|---|---|---|
| Dividends declared | ### | |
| Dividends payable | ### |
The dividend declared account is a contra account to the retained earnings in which its normal balance is on the debit side. Likewise, this journal entry will decrease the balance of retained earnings on the equity and increase the total liabilities on the balance sheet.
The dividends declared account will be cleared with the retained earnings when the company closes the account at the end of the period.
Dividend paid
When the company makes the dividend payment for the shareholder distribution, it can make the journal entry by debiting the dividends payable account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Dividends payable | ### | |
| Cash | ### |
In this journal entry, both total liabilities and total assets on the balance sheet decrease by the same amount.
This journal entry should only be made after the board of directors has approved the dividend for the period. In other words, the company should never make any dividend payment without approval from the board of directors.
Shareholder distribution example
For example, on December 20, 2021, the board of directors of the company ABC, which is a corporation, approve a $500,000 cash dividend for the shareholder distribution of the fourth quarter. This $500,000 dividend is to be paid on January 10, 2022, for all shareholders with a record date of December 31, 2021.
Requirement:
What is the journal entry for shareholder distribution on December 20, 2021, and January 10, 2022?
Solution:
The company ABC can make the journal entry for shareholder distribution on the dividend declaration date of December 20, 2021, and on the dividend payment date of January 10, 2022, as below:
December 20, 2021
On December 20, 2021, which is the date of dividend declared, the company ABC can make the journal entry by debiting the $500,000 amount into the dividends declared account and crediting the same amount into the dividends payable account.
| Account | Debit | Credit |
|---|---|---|
| Dividends declared | 500,000 | |
| Dividends payable | 500,000 |
In this journal entry, total equity on the balance sheet reduces by $500,000 while total liabilities increase by the same amount of $500,000 as of December 20, 2021.
January 10, 2022
On January 10, 2022, when the company ABC pays the $500,000 cash dividend to its shareholders, it can make the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Dividends payable | 500,000 | |
| Cash | 500,000 |
In this journal entry, both total liabilities and total assets on the balance sheet decrease by $500,000 as of January 10, 2022.
It may be useful to note that there is no journal entry for the shareholder distribution transaction on the record date. The record date of dividend is the date that the company determines the ownership of the shares; hence only those who own the shares on the record date will receive the dividend payment.
Likewise, as in the example, the record date that determines the ownership of shares to receive the dividend distribution is on December 31, 2021. However, there is no journal entry made on December 31, 2021.