A dividend payable account is the liability account that carries a dividend the board of directors has declared but has not yet paid. It is credited on the declaration date, when the corporation takes on the obligation, and debited on the payment date, when the cash goes out and the balance returns to zero. No expense is recorded at either point, because a dividend hands profit to the owners rather than consuming resources to earn it.
The Two Entries That Open and Close the Account
Declaring the dividend creates the liability. The entry debits retained earnings and credits dividends payable for the declared amount. Some firms route that debit through a temporary Dividends Declared account, which is emptied into retained earnings at the close, so the destination is the same either way. A dividend declared and not yet paid is an obligation with nothing given in return, the case set out in liabilities.
Paying the dividend retires the liability. The entry debits dividends payable and credits cash, and nothing is left in the account afterward.
Neither entry reaches income, because the transaction belongs to a different element. Distributions to owners are decreases in equity of an entity resulting from transferring assets, rendering services, or incurring liabilities by the entity to owners (FASB Concepts Statement No. 8, Chapter 4, paragraph E72).
Expenses are the other element, and they arise from delivering or producing goods, rendering services, or carrying out other activities (FASB Concepts Statement No. 8, Chapter 4, paragraph E81). A dividend does none of those things, so the account never touches the income statement.
A Worked Example
Say a corporation with one class of shares outstanding declares a cash dividend on the figures below and pays it in a later month.
Shares outstanding 50,000
Dividend declared, per share 0.60
------
Dividend declared, total 30,000
Declaration date
Retained earnings 30,000
Dividends payable 30,000
Payment date
Dividends payable 30,000
Cash 30,000The account opens and closes at the same amount, so a balance exists only between the two dates. Equity falls on the first and cash on the second, so a period end between them reports the obligation without the payment. The equity side of that first entry runs through the roll-forward in the statement of retained earnings, and what the gap does to a payout ratio sits in dividend ratios.
Declaration, Record and Payment
Three dates surround the account, and only two of them move a balance.
The declaration date is the one the ledger reacts to, because the board’s resolution is what creates the obligation. Whether to declare is discretionary, and what a board may pay out of is fixed by state corporate law, both set out in stockholder.
The record date decides who gets paid and moves nothing. Under Delaware law, in order that the corporation may determine the stockholders entitled to receive payment of any dividend, the board of directors may fix a record date, which shall be not more than 60 days prior to such action (8 Del. C. § 213(c)).
The payment date closes the account, and a publicly traded issuer announces all three together. The notice carries the date of declaration, the date of record for determining holders entitled to receive the dividend, and the date of payment, and it is due no later than 10 days prior to the record date (17 CFR 240.10b-17).
What the Account Is Not
It is not the temporary Dividends account. That one carries a debit balance, sits on the equity side, and is closed into retained earnings at period end, while dividends payable carries a credit balance and survives the close until the cash goes out.
It is not accounts payable, which comes from supplier invoices for goods and services the business received. A dividend buys nothing.
A stock dividend creates no liability here. It is an issuance by a corporation of its own common shares to its common shareholders without consideration, and in the case of a stock dividend or split-up there is no distribution, division, or severance of corporate assets (ARB No. 43, Chapter 7B, paragraphs 1 and 6). Nothing will leave, so nothing is owed.
An undeclared cumulative preferred dividend in arrears never enters the account. Until the board acts there is no obligation to record, and the disclosure that stands in its place is set out in preferred stock.
Common Questions
It is a declared dividend the corporation still owes. The account is usually captioned in the plural, because it holds every declaration outstanding at the reporting date.
A liability account, normally a current one, carrying a credit balance. It is neither an equity account nor an expense account, and the rule that decides which side moves it is in debit vs credit.
Credit it on declaration, against retained earnings or a temporary Dividends Declared account, and debit it on payment, against cash. Between those two dates there is nothing to record.
Inside current liabilities, because settling it will use current assets, the test worked through in current liabilities. A corporate return per books gives it no line of its own, so it lands inside other current liabilities on line 18 of Schedule L (IRS, Form 1120).
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