Dividends in cash to offer a common way for companies to return capital to its shareholders. Cash dividends affect the accounts of funds and equity capital in the first place. There is no separate balance account for the payment of dividends after they are paid. However, after the Declaration of a dividend until the actual payment, the company records a liability of the shareholders for payment of dividends account.
After payment of dividends, subject to the payment of dividends is restored and is no longer present on the side of liabilities. When dividends are paid, the impact on the balance sheet is a reduction to retained earnings of the Company and its cash balance. As a result, the balance sheet Size is reduced. Retained earnings transferred to equity balance.
However, when the company reports its quarterly results, balance sheet reports only the ending account balances. As a result, the dividend has been paid, and a decrease in retained earnings and cash has already been recorded. In other words, investors do not see the account entry responsibility.
Investors will also be able to see the Total amount of dividends paid during the period under report financing cash flows. Report on cash flow shows how much cash is entering or exiting from the company and in the case of dividends, it will be listed as the use of cash for the period.
Consider a company that has 2 million common shares and declares dividends at the rate of 25 cents per share. At the time of Declaration of dividends, the company records a write-off of money resources into its account of retained earnings in the amount of $500,000 and loans payable dividends for the same amount. After the company makes payment of dividends to its shareholders, subject to the payment of dividends, the account is restored and is debited for $500,000. On cash and cash equivalents accounts are also reduced by the same amount due to the loan in the amount of $500,000.
After receiving the cash dividends are paid, the balance sheet of the company do not have any accounts related to dividends. However, the company’s balance sheet Size decreases as its assets and equity is decreased by 500 000$.