As a member, you'll also get unlimited access to over 55, lessons in math, English, science, history, and more. Plus, get practice tests, quizzes, and personalized coaching to help you succeed. Log in or sign up to add this lesson to a Custom Course. Login or Sign up. When investors purchase a share in a company, they are doing so for two reasons.

Firstly, they hope to enjoy an increase in the value of the purchased shares as the market value increases, and they want to receive a steady income from dividends. Dividends represent a distribution of a company's retained earnings to its shareholders. Retained earnings represent the accumulation of all of the earnings that a company has earned and not distributed to its shareholders owners since the business started.

Dividends are declared by a company's Board of Directors and paid to shareholders shortly after. Vest has recently purchased shares in the Phones 4 You company and is looking forward to receiving his first dividend payment.

How do stock dividends affect the retained earnings account? | Investopedia

He has heard about five different types of dividends, but he isn't sure what the difference is between them. Let's learn about the different dividends that Mr.

This is the most common type of dividend, and it involves a company paying its shareholders a cash amount that is declared by its Board of Directors. Cash dividends are expressed as a dollar amount per share, and three dates are important for cash dividends: Date of declaration is the date that the Board of Directors approves the dividend and the company has committed itself to an obligation to pay its shareholders.

As a result, accounting is required. Date of record reflects the date that you must have been a shareholder to be entitled to receive a dividend. No accounting is needed on this date. Date of payment represents the date that dividend checks are sent to shareholders. Since it involves a use of company cash, an accounting entry is required. Let's assume that Phones 4 You has 10, shares outstanding.

The accounting entries would be this:. A property dividend represents a non-cash alternative to dividend payment, and investment securities are the usual tool used.

The transaction is valued using the fair market value of the asset that is given up. Fair market value represents the amount that a knowledgeable buyer would pay on the open market. The same dates date of declaration, date of record, and date of payment apply to a property dividend. Let's assume that Phones 4 You declared a property dividend on April 15th to shareholders on record as of April 22nd with a payment on April 30th.

The entries would be:. Payment of property dividends reduces the company's assets investments and retained earnings. An asset is something of value that a company owns. A company may have sufficient retained earnings to pay a dividend but may find itself short on cash. Since investors expect to receive a dividend as part of their compensation for purchasing and holding shares, the company may decide to issue a scrip dividend instead.

A scrip dividend represents a promise to pay the dividend at a future date when the company's cash flow is more favorable. The promise to pay is recorded as a promissory note that contains details about the amount, term, and interest rate. The following entries would be recorded:. Note that the company's retained earnings have decreased and so has cash.

A liquidating dividend is a situation where the amount of the dividend is greater than the balance in the company's retained earnings account. In other words, the company is returning part of shareholders' investment, known as contributed capital , as part of the dividend payment. The following entries would be made:.

Sometimes a company would like to pay dividends to its shareholders to keep them happy but doesn't have the cash flow to do it. Stock dividends represent a distribution to shareholders consisting of the company's own shares.

Even though the number of shares held by each shareholder increases after a stock dividend, the total percentage held by each shareholder does not change. In order to record the transaction, a value must be placed on the share distribution, and the fair market value of the shares is used for this purpose. The entry to record this transaction would be:. You will also notice that assets will not change as cash is not used to pay this dividend. Shareholders expect to receive dividend payments on a regular basis for shares that they own.

Retained earnings decrease when any type of dividend is declared and company cash is used to pay cash, scrip, and liquidating dividends. Stock dividends involve the issue of company shares to shareholders, and when a property dividend is paid, a company investment decreases.

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How do dividends affect retained earnings? | Investopedia

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Research Methods in Psychology. Analyzing and Interpreting Literature. Intro to Political Science. Deborah Schell Deborah teaches college Accounting and has a master's degree in Educational Technology. What Is a Dividend? Cash Dividends This is the most common type of dividend, and it involves a company paying its shareholders a cash amount that is declared by its Board of Directors.

The accounting entries would be this: Cash Dividend Payment of cash dividends reduces the company's cash balance as well as retained earnings. Property Dividends A property dividend represents a non-cash alternative to dividend payment, and investment securities are the usual tool used.

The entries would be: Scrip Dividends A company may have sufficient retained earnings to pay a dividend but may find itself short on cash. The following entries would be recorded: Scrip Dividends Note that the company's retained earnings have decreased and so has cash.

Start a FREE trial No obligation, cancel anytime. Want to learn more? Select a subject to preview related courses: The following entries would be made: Liquidating Dividend Sometimes a company would like to pay dividends to its shareholders to keep them happy but doesn't have the cash flow to do it.

The entry to record this transaction would be: Lesson Summary Shareholders expect to receive dividend payments on a regular basis for shares that they own. Unlock Your Education See for yourself why 10 million people use Study. Become a Member Already a member?

Does a Cash Dividend Decrease Retained Earnings and Total Stockholder's Equity? - Budgeting Money

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