After a corporation declares a cash dividend, what takes place on the date of record?

Question

Quizplus · Accepted Answer

On the date of record for a cash dividend, the corporation identifies the shareholders who are entitled to receive the dividend. However, no accounting entry is made on this date. The accounting entries for a cash dividend occur at two different times: first, when the dividend is declared, and second, when the dividend is actually paid.
When the dividend is declared, the corporation makes the following journal entry:
1. Debit Dividends (which reduces retained earnings, a component of stockholders' equity)
2. Credit Dividends Payable (which increases liabilities)
This entry recognizes the company's obligation to pay the dividend. The declaration of the dividend decreases stockholders' equity and increases liabilities.
On the payment date, which occurs after the date of record, the company makes the following journal entry:
1. Debit Dividends Payable (which decreases liabilities)
2. Credit Cash (which decreases assets)
This entry reflects the actual payment of the dividend, reducing both the company's cash and its liabilities.
Therefore, on the date of record itself, there is no need for an accounting entry, as it is simply the date used to determine which shareholders are entitled to receive the dividend. The financial effects of the dividend are recorded at the declaration and payment dates, not on the date of record.

After a Corporation Declares a Cash Dividend, What Takes Place