 Hello and welcome to this session in which we will discuss a CPA simulation that is cash dividend. This CPA simulation, it's very similar to an intermediate accounting exercise that you might see in your college textbook. Regardless, you have to understand what dividend is, what journal entries are, what the different dates for dividend is. Now what is dividend real quick? Dividend is profit paid to shareholders. What does that mean? Well, the company generate revenues, then they incur expenses. And as a result, if we have more revenues and expenses, we have net income. Now what happened to that net income? That net income transferred immediately to retained earnings, then the company can do what? From the retained earnings, the company can pay some part out of dividend and whatever they don't pay in dividend to shareholders, it will stay in retained earnings. So the first thing you want to understand, the idea of dividend comes out of retained earnings. So we pay dividend out of retained earnings. Generally speaking, you don't pay dividend if you don't have retained earnings. And obviously, if you're paying cash dividend, you have to have the cash and you have to have the retained earnings because that's the idea of dividend. When it comes with dividend, we have three dates to be aware of. For example, in this exercise, we have three dates, April 1st, April 10th and April 15th. So you need to know what happened on each of these dates and what is the journal and what's the meaning of April 1st, what's the meaning of April 10, what's the meaning of April 15. There is a name for each of these dates and there is something you have to do on that date. So the best way to illustrate this is to look at an example. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. On April 1st, the Board of Directors of Aram Company declared cash dividend of $2 per share on its 1 million shares outstanding. So the first date is April 1st. What do we call this date? Well, on this date, the Board of Directors declared the cash dividend. They told everyone, they made a press conference or they issued a press report saying that we decided to pay $2 on our 1 million shares outstanding. This date is called the declaration date. As soon as the company declare the dividend, the dividend becomes a liability. Once again, what do dividend comes out of? Dividend comes out of retained earnings. So we're going to assume they have more than 2 million in retained earnings because they are going to pay 2 million and we assume they have more than 2 million in cash. Now not all dividend is paid in cash. This is a cash dividend. Some dividend is paid in stocks, some dividend is paid in property and we would look at those in a separate session. So on April 1st, the company will debit retained earnings and they will credit dividend payable. It becomes a liability. The declaration basically they commit it and becomes a liability and dividend payable is a short-term liability because you have to pay the dividend in the near future, way less than a year. Within a month you have to pay the dividend. Now on some textbook or in some CPA review course, rather than retained earnings, they might have the account called dividend. Well, the dividend is basically it's a contra retained earning. It's reducing retained earnings. It's a contra-aquary. But usually it comes out of retained earnings. Therefore, we reduce retained earnings immediately. And by the way, understanding how retained earnings is important because what happened is retained earnings is increased by net income, increased by net income on the credit and reduced by dividend and losses. Those are the main accounts that affect retained earnings, not the only account but the main account. Now we reduce retained earnings. April 1st non-declaration date. The dividend is payable on April 15th for the stockholders of record April 10th. So the next date we have to worry about is April 10th. What do we have to do on April 10th? April 10th is called the record because this is called the record state. What do we have to do on the record state? Well, guess what? It's easy. We don't have to do anything. From a journal entry perspective, there's no entry. Now on the CPA exam they may tell you if there's no entry, select no entry. Make sure to select no entry so the system knows you know there's no entry. Don't keep it empty. They might give you two places or maybe three lines to input a journal entry. Well, one of them is no entry, you put no entry. So what is the record state? Here's what we're saying. On April 1st we said we're going to pay $2 per share for each shareholder but you have to be an owner on April 10th. So as long as you own the stock on April 10th, you are an owner on record. Now who checks that owner on record? Each company will have what's called a transfer agent. The transfer agent, their job is to keep track of who owns the stock, their name, their addresses of their individuals, their social security because we have to send them the tax form, if their company is their EIN, so on and so forth. So if you own the stock on that date, guess what? You're going to be paid. Now April 11th you can sell it and get rid of it. That's fine. You're going to still get the dividend. Now it's a payable on the 15th. What happened on the 15th? It's a payable. We are going to actually send you a check or transfer the money to your bank account. What happened on that date? We are ready to pay this liability, this dividend payable. What do we do when we pay a liability? Just like any liability, we debit the liability. Therefore the liability is gone. The liability is gone. Basically debit credit liability dividend payable is gone. And how do we pay it? We pay it in cash. We credit cash. So let's take a look at the overall picture what happens here. What we're left with is debit retained earnings, credit cash. So from a balance sheet perspective, if we have a balance sheet, what happens is our assets went down and our equity went down. The point is when you pay dividend in cash, assets go down and equity goes down. So the company basically shrinking. Why? Because we are giving part of the asset, which is cash, to be more specific to the shareholders, it's leaving the company. The company is basically shrinking. So every time we pay cash dividend, now not all dividend do this. Well, we're going to see later we have property dividend that will do this, but we also have a stock dividend. Stock dividend will not do this, will not reduce asset and equity. But any sorts of dividend other than stock dividend, it's going to reduce the company's asset, it's going to reduce the company's equity. This topic is important. Study hard for it. It's dividend. This could be an easy, peasy simulation. It could have cash dividend, property dividend, stock dividend. We would look and we have liquidating dividend as well. We would look at all of those. Good luck. Study hard.