How do you declare a dividend?

To declare a dividend, an entity must declare a dividend amount per share, and a dividend declaration and payment date must be determined. Finally, a corresponding journal entry must be prepared.

1. Declare dividend amount per share

   Dividends are issued based on per share data. An entity's Board of Directors must issue an official statement regarding the dividend declaration. This statement lists the dividend amount per share and the financial position of the entity. In addition, the statement clarifies whether the dividends apply to common shareholders, preferred shareholders, or both.

2. Determine dividend declaration and payment date

   Once the Board of Directors has determined the dividend amount, it is required to set the declaration date. This date is important as there are certain filings that must be completed to officially declare the dividend. The dividend payment date should also be determined at this time, as this date serves as the income recognition date for shareholders.

3. Prepare the necessary journal entries

   When dividends are paid, there are associated financial implications. An entity must prepare a journal entry to account for the dividend payment. This journal entry reduces retained earnings. In addition, since cash is being paid, the cash balance must also be reduced accordingly. The corresponding journal entries impact the entity's future financial statements.