Declaration creates the liability; the record date is silent; payment clears it
◈ 11 cardsRecord a cash dividend at declaration and at payment (nothing at the record date), state the two things a company must have to declare one, allocate a dividend between cumulative preferred and common, and describe stock dividends and splits as no-cash, no-total-equity events.
Three dates, two entries
On 15 December Northlake Nordic Centre Inc.’s board declares a cash dividend of 30,000, payable on 15 January to shareholders of record on 31 December. Three dates; two of them have entries.
Declaration date. The board’s resolution creates a legal obligation. From that moment Northlake owes its shareholders 30,000:
Dec 15 Dividends 30,000
Dividends Payable 30,000Dividends is a temporary equity account (closed to Retained Earnings at year end, L6.4 — a case may instead debit Retained Earnings directly); Dividends Payable is a current liability. Not Cash — nothing has been paid — and not Dividend Expense: a dividend is a distribution of profit to owners, never a cost of earning it, and it never appears on the income statement.
Record date. On 31 December the share register is consulted to see who will be paid. That is administration — no entry. It is also the year end, so the 31 December balance sheet shows Dividends Payable 30,000 among current liabilities, and the statement of retained earnings deducts 30,000 of dividends declared, though not a dollar has left the bank.
Payment date. On 15 January the cheques go out:
Jan 15 Dividends Payable 30,000
Cash 30,000Debiting Dividends again would count the dividend twice; the declaration already reduced equity. Next year’s cash flow statement will show the 30,000 as a financing outflow — dividends paid — which is why declared and paid can differ by exactly this item (L12.7).
Two things a company needs
To declare a dividend a company needs retained earnings to declare against — a company with a deficit cannot legally distribute what it has not earned — and cash to pay it. The two are different things. Northlake has retained earnings of 190,000 and cash of 41,000; the owner proposes a 60,000 dividend. The retained earnings permit it; the cash does not. Retained earnings is not a pile of money — it has been reinvested in groomers, snowcats and a lodge — and a dividend is limited by the smaller of the two.
Preferred first, and in arrears
Northlake’s 1,000 preferred shares carry a $4 cumulative dividend: 4,000 a year, and if a year is skipped the arrears must be paid before common shareholders receive anything. No dividend was declared in the last two years. Now the board declares 20,000:
| Amount | |
|---|---|
| Preferred — two years in arrears | 8,000 |
| Preferred — current year | 4,000 |
| Preferred total | 12,000 |
| Common — the remainder | 8,000 |
Arrears are not a liability until declared — they are disclosed in a note — but they come first when a dividend is finally declared. Had the preferred been non-cumulative, the skipped years would be gone and common would receive 16,000.
Stock dividends and splits — recall only
A stock dividend distributes more shares instead of cash: retained earnings falls and share capital rises by the same amount, total equity unchanged, no cash. A stock split — two shares for each one held — changes only the share count and the price per share: no entry, no change to any balance. Neither is cash, neither changes total equity, and a 191 paper asks only that you say so.