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Section 2Distributing the Earnings of a Corporation
Section 2Distributing the Earnings of a Corporation
What You’ll Learn
Why and how corporations
distribute their earnings.
How to record dividends on
preferred stock.
How to record dividends on
common stock.
What You’ll Learn
Why and how corporations
distribute their earnings.
How to record dividends on
preferred stock.
How to record dividends on
common stock.
Why It’s Important
When the board of directors of a
corporation decides to distribute
profits in the form of dividends, a
general journal entry is recorded.
Why It’s Important
When the board of directors of a
corporation decides to distribute
profits in the form of dividends, a
general journal entry is recorded.
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Key Terms
dividend
Key Terms
dividend
DividendsDividends
The corporation’s board of directors
declares, or authorizes, dividends.
Before a dividend is declared, the
corporation should have a sufficient
amount of cash available to pay the
dividend.
There must be an adequate balance
in the Retained Earnings account.
The corporation’s board of directors
declares, or authorizes, dividends.
Before a dividend is declared, the
corporation should have a sufficient
amount of cash available to pay the
dividend.
There must be an adequate balance
in the Retained Earnings account.
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Dividends (cont'd.)Dividends (cont'd.)
A separate account named Dividends is used to record dividends declared. The Dividends account is a contra-stockholders’ equity account.
A liability account, Dividends Payable, is used to record the amount of dividends that will be paid on the payment date.
A separate account named Dividends is used to record dividends declared. The Dividends account is a contra-stockholders’ equity account.
A liability account, Dividends Payable, is used to record the amount of dividends that will be paid on the payment date.
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Section 2 Distributing the Earnings of a Corporation (cont'd.)
DividendsCredit
–Decrease Side
Debit+
Increase SideNormal Balance
Three Important Dates in the Dividend ProcessThree Important Dates in the Dividend Process
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Dividends on Preferred StockDividends on Preferred Stock
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Business Transaction
On November 15, the board of directors for On Your Mark declared an annual cash dividend on the 250 shares of preferred $6 stock issued. The dividend is payable to preferred stockholders of record on November 29. The dividend will be paid on December 15. The total amount of the preferred dividends is $1,500 (250 shares $6), Memorandum 215.
JOURNAL ENTRY
Date of PaymentDate of Payment
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Business Transaction
On December 15, On Your Mark issued Check 1373 for $1,500 in payment of the dividend on preferred stock declared November 15.
JOURNAL ENTRY
Check Your UnderstandingCheck Your Understanding
What two conditions should
exist before a cash dividend is
declared?
What two conditions should
exist before a cash dividend is
declared?
Section 2 Distributing the Earnings of a Corporation (cont'd.)
Section 2 Distributing the Earnings of a Corporation (cont'd.)
