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 look at the journal entry for dividends paid as shares instead of cash. This article forms part of our accounting tutorial series, and we welcome any suggestions for other articles you would like to see included.
If you are here for a quick answer, the debit is to the 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. Corporations pay dividends out of after income tax profits, either in the form of cash or shares. Dividend distribution is often quoted on a per-share allocation basis (or earnings per share. Financial analysis’ use this figure to calculate ratios such as dividend yield and price to earnings (P/E).
Different classes of shares will sometimes carry different dividend distributions. However, in many countries, the distributions have to be the same per share within a class of shares under corporate law.
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.
Using the accounting equation, we will deal with revenue, which is a dividend receipt, and then which asset class to add to 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 cash, which they picked up through their bank statements. So a debit of $1,500 is recorded in their accounts. To keep the accounting equation in balance, the credit entry is to the revenue account dividends received.
If ABC were to receive their dividends in the form of shares in the example, 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 had ABC Ltd decided to sell these shares within the next financial year; they would be classified as a current asset.
So just a short article looking at how a dividend collected through bank receipt should be recorded in a journal entry. Remember, the credit entry to revenue is the same whether cash or shares are received as the dividend.