In this article we answer a question from a reader who asked “what is the journal entry that records a dividend received or collected as cash into their bank account”. We also quickly look at what the entry is when dividends are paid as shares instead. This article forms part of our accounting tutorial series and welcome any suggestions for other articles you would like see included.
If you are here for the quick answer the debit is to bank and the credit is to dividends received, a revenue account. If you would like more information … please read on.
What is a Dividend?
Dividends are a distribution of retained earnings from a company, which can be public or private. Dividends can be in the form of cash or shares and are paid out of profits after corporation income tax has been deducted. Dividends are often quoted on a per share allocation basis (or earnings per share), which is used by financial analysis to calculate ratios such as dividend yield and price to earnings (P/E).
Different classes of shares will sometimes carry different dividend distributions, although under corporation law in many countries the distributions have to be the same per share within a class of shares.
Example Journal Entry
In this article we aren’t concerned with how dividends are declared nor paid by a company, but rather just the receipt of the payment by a shareholder.
Thinking through using the accounting equation, what we will be dealing with is revenue, which is what a dividend receipt is, and then which asset class to add to: either cash or shares held. We’ll look at both.
In this example we will assume ABC Ltd holds 1,000 shares in XYZ Ltd. XYZ declares and pays a dividend on April 20 of $1.50 per share – often called a dividend per share (DPS).
The amount received by ABC Ltd is:
1,000 shares x $1.50 DPS = $1,500
In this case ABC received their dividends in the form of cash, which they picked up through their bank statements. So a debit of $1,500 is recorded in their accounts. The credit entry, to keep the accounting equation in balance, in this case is to the revenue account dividends received.
If in the example ABC was to receive their dividends in the form of shares, we would make the following journal entry instead. Let’s say ABC received 150 shares, which are valued at $10 each:
|April 20||Shares in XYZ Ltd||1,500|||
This time the debit is to ABC’s investment asset account, which records its holdings in XYZ Ltd. This account would most likely be held as a non-current asset in their balance sheet. Although if they had decided to sell these shares within the next financial year, then it would be disclosed as a current asset.
So just a short article today looking at how a dividend collected through bank receipt should be recorded through a journal entry. Remember the credit entry to revenue is the same no matter if cash or shares are received as the dividend.