Dividends of any kind, cash or stock, represent a return of profits to the company owners, so they reduce the retained earnings account in the stockholders' equity section of the balance sheet. After all, retained earnings is simply the company's accumulated profits. To understand the accounting for a stock dividend, it helps to take a quick look at how a cash dividend affects the balance sheet.
How that breaks down per share is irrelevant to the accounting. The balance sheet remains balanced. A stock dividend, by definition, doesn't involve cash, so it has no effect on the cash account.
In fact, a stock dividend doesn't affect assets at all, because while the company gives out more stock, the overall value of the company doesn't change. The accounting occurs entirely in the equity section of the balance sheet. Cash dividends are the payments a corporation makes to its shareholders as a return of the company's profits. Paid on a per-share basis, only the shareholders on record by a certain date are entitled to receive the cash payout.
Dividends and retained earnings are closely linked, since dividend payments come from those earnings. Dividends are often paid quarterly, but may also be paid annually or semi-annually. Retained earnings, as the Leavey School of Business discusses , is an equity account found on the company's balance sheet: It's reduced at the time the dividends are declared, not at the time the dividends are paid. Retained earnings is an equity account that comprises the balance of a company's earnings accumulated over time that remains "retained" or undistributed.
Though uncommon, it is possible for a company to have a negative stockholder equity value if its liabilities outweigh its assets. One of the most important financial statements companies issue each year is the balance sheet.
The balance sheet outlines all a company's assets and liabilities. Basically, the balance sheet is a rundown of all the things a company owns, including cash, property, investments, and inventory, as well as everything it owes to other parties, such as loans, accounts payable, and income tax due. It offers a snapshot of a company's financial situation at a specific moment in time. Stockholders' equity includes retained earnings, paid-in capital, treasury stock , and other accumulative income.
If assets and liabilities figures are not readily available, the stockholder equity can be calculated by adding preferred stock to common stock and adding additional paid-in capital, adding or subtracting retained earnings, and subtracting treasury stock.
Stockholder equity is usually referred to as a company's book value. The retained earnings section of the balance sheet reflects the total amount of profit a company has retained over time. The company can choose to do one of three things with its profit: pay dividends to shareholders, reinvest the funds into the company, or leave it on account.
The portion of profits left on account is rolled over each year and listed on the balance sheet as retained earnings. The effect of dividends on stockholders' equity is dictated by the type of dividend issued. When a company issues a dividend to its shareholders, the value of that dividend is deducted from its retained earnings. However, a cash dividend results in a straight reduction of retained earnings, while a stock dividend results in a transfer of funds from retained earnings to paid-in capital.
The company's stockholder equity is reduced by the dividend amount, and its total liability is increased temporarily because the dividend has not yet been paid. Since stockholders' equity is equal to assets minus liabilities, any reduction in stockholders' equity must be mirrored by a reduction in total assets, and vice versa. The accounting changes slightly if ABC issues a stock dividend.
The value of the dividend is distributed between common stock and additional paid-in capital. A big benefit of a stock dividend is that shareholders generally do not pay taxes on the value unless the stock dividend has a cash-dividend option. The common stock sub-account includes only the par, or face value , of the stock. The additional paid-in capital sub-account includes the value of the stock above its par value.
The net effect of the stock dividend is simply an increase in the paid-in capital sub-account and a reduction of retained earnings. The total stockholder equity remains unchanged. Harper College. Accessed Apr. University of Oklahoma Price College of Business. University of California, Santa Cruz. Internal Revenue Service. Dividend Stocks. Tools for Fundamental Analysis. Financial Statements. Stock Trading. Your Privacy Rights.
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