The dividends payable account normally shows a credit balance because it's a short-term debt a company must settle in the next 12 months. This item is integral to a balance sheet, the financial synopsis that provides a glimpse into a company's assets, debts and investors' money. However, dividend remittances also reduce retained earnings, which is a shareholders' equity statement component.
When a company rewards shareholders -- those who put their cash into operating activities -- by declaring dividends, accountants debit the retained earnings master account and credit the dividends payable account. On the payment date, they credit the cash account and debit the dividends payable account -- to bring it back to zero. When accountants talk about crediting cash, they mean reducing company money. If company management decides to pay dividends after 12 months -- a rare occurrence, however -- accountants report the remittances in the "long-term debts" section of a balance sheet.
Quick Note on Credits and Debits
Credits and debits constitute the language of business accounting, the regulatory framework everyone -- from financial managers to investors -- uses to evaluate whether a company is making money and whether it's serious about sound financial reporting. Under accounting rules, a bookkeeper debits an asset or expense account to increase its worth and credits the account to reduce its balance. The opposite holds true for a liability, equity and revenue account. Taken together, these five items -- assets, expenses, liabilities, equity and revenues -- are the pillars of corporate financial statements. These include a balance sheet, an income statement, a statement of cash flows and a statement of retained earnings.
Weathering the Competitive Storm
For a company's leadership, paying dividends periodically and ensuring that accountants report them accurately are money-saving and growth-building initiatives. The remittances help keep investors satisfied so they're eager to pony up more cash to buy more corporate shares. Higher stock sales means more money coming in company coffers, which is a bright scenario to weather a bad economy, pound rivals, formulate unassailable marketing strategies and implement far-reaching changes in the way the organization conducts business.
Tools and Staff Involvement
Corporate personnel, such as bookkeepers, accountants and financial managers, ensure that dividends carry accurate credit balances and that the related remittances make it into the appropriate financial statements. Investment analysts, regulatory compliance specialists and investor-relations personnel also weigh in on dividend payment considerations. To perform tasks adeptly, these employees use tools such as financial analysis software; enterprise resource planning programs; document management software; information retrieval or search applications; and financial accounting, analysis and reporting software, also called FAARS.
- AccountingCoach; How Do Cash Dividends Affect the Financial Statements?; Harold Averkamp
- University of Maryland Smith School of Business; Financial Management; Dividend Policy
- "Dividend Policy Decisions"; Itzhak Ben-David; May 2010 (PDF)
- University of Massachusetts Lowell; Cash Dividends; Professor C. P. (Monty) Carter