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Dividends are when a company pays shareholders back a share of profits.
Scenario: With the recent success of your lemonade stand, on March 1st you declare a $1 cash dividend per share to your shareholders. There are currently 80 shares in the market.
The blue underlined text signals...
- If we're declar[ing] a $1 cash dividend... ➡️ We'll eventually owe this to our shareholders through Dividends Payable.
- Considering that dividends represent a share of profits... ➡️ They'll be pulled out of Retained Earnings.
Dividend Amount = $1 cash dividend
Number of Shares = 80 shares
Dividend Payout = $1 x 80
Dividend Payout = $80
The reason is...
- We now owe (+) dividends to our shareholders, and we're liable to pay them.
- This is represented through Dividends Payable.
- Which is a liability account, and therefore has a normal credit balance.
- So, to increase it by $80, we'll credit it.
The reason is...
- We have pulled from (-) our net income to pay these dividends.
- Net income is stored in Retained Earnings.
- Which is an equity account, and therefore has a normal credit balance.
- So, to decrease it by $80, we'll debit it.
