When a corporation declares a dividend, a liability must be recorded.

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When a corporation declares a dividend, it is announcing its intention to distribute a portion of its earnings to shareholders. At the moment the dividend is declared by the board of directors, the corporation incurs a legal obligation to pay the specified amount to shareholders on a set date in the future, known as the payment date.As a result of this declaration, the corporation must record a liability on its balance sheet to reflect the outstanding obligation to pay the dividends. This liability is typically recorded in an account called "Dividends Payable." The entry to record the liability is a debit to the retained earnings account, which reduces the corporation's equity, and a credit to the dividends payable account, which increases current liabilities.
The journal entry at the time of declaration would look like this:
- Debit: Retained Earnings (for the total amount of the dividend declared)
- Credit: Dividends Payable (for the total amount of the dividend declared)
This entry does not involve the cash account because the cash payment has not yet occurred. It is not until the payment date that the corporation will make the actual cash payment to shareholders, at which point the company will record a debit to the Dividends Payable account to remove the liability and a credit to Cash to reflect the outflow of funds.
The journal entry on the payment date would be:
- Debit: Dividends Payable (for the total amount of the dividend paid)
- Credit: Cash (for the total amount of the dividend paid)
By recording the dividend as a liability at the time of declaration, the corporation ensures that its financial statements accurately reflect its current financial obligations and that the shareholders' equity is properly adjusted for the reduction in retained earnings due to the dividend declaration.

When a Corporation Declares a Dividend, a Liability Must Be