 In this presentation we will take a look at the transaction related to the recording of cash dividends. We're going to have our information up top. We're going to record that to our general journal here and then post that not to the general ledger but to a quick worksheet which can show us the effect on the accounting equation and individual accounts. Our trial balance is a very simple trial balance but one that is in balance and will give us a good idea of the effect on the accounting equation and the components of it and individual accounts. We've got the cash and green, we got the liabilities in orange, we got the equity section in light blue and the income statement including revenue and expenses in dark blue. Debits are going to be positive numbers, credits negative numbers for purposes here. Debits minus the credits equal zero represented by the green zero down here. No net income because there's nothing currently in revenue and expenses. Again it's really helpful for us to see just a nice something that's in balance to record any type of transaction so that we can see the effects. What we have here then is a $2 per share cash dividend declared. So this is the point of declaration that we have a cash dividend the board of directions got together board of directors got together and declared a cash dividend of $2 for per share. What that means is that anybody that however many shares are out there anybody that has the stock should get a $2 dividend for however many stocks they have. And remember the only differentiation between the ownership here is the number of stocks they have. The stocks all be in uniform. So in the equity section of the trial balance we're not listing out the owners here we don't need to list out the owners. All we need to do is list out the amount that's the investment common stock here versus the retained earnings that have accumulated over time and then we just need to be able to distribute the number that this dividend to the stockholders based on how many stockholders there are. So to record the transaction we need the first to know well how many stockholders are there and we can see that here if there's a par value on the trial balance we can say okay there's six hundred thousand six hundred thousand recorded in the in the common stock divided by the par value five dollars there's a hundred and twenty thousand shares then. And we're gonna give two dollars per share so we'll take that and multiply times two and that gives us the two hundred and forty thousand dollars. So that's gonna be the dividend that we are going to pay out. So we're gonna pay it out of retained earnings. Now you might first think well why don't why don't we deal with cash first we can decrease cash. Note that cash is not happening yet we will pay the cash but it's a bureaucratic process we're not paying the cash yet what we're doing first is taking it out of retained earnings and recording the related liability that we will record. Note that the retained earnings has a credit balance and retained earnings can be confusing if we've been working with a partnership or a sole proprietor where we would just work with a capital account. Note that this whole thing is just basically a capital account and so the retain this whole thing's you know the capital account owed to the owners the all the owners being stockholders it's broken out between the investment and the amount of accumulation of revenue called retained earnings. So when we pay back the owners we don't want to take it out of the investment we want to take it out of the accumulation of revenue called retained earnings. Now if we see a partnership or a sole proprietor we might record that as draws throughout the time period which we then close out to retained earnings at the end. We could do the same thing here we could make a contra account which will which will actually do later to show the closing process in that format just to give it more transparent but we could just have another like contra equity account which would be called dividends which would be a debit balance account which we would then close out in the closing process to retained earnings or we could just directly take it out of basically retained earnings which we are doing here. So we're going to reduce retained earnings retained earnings has a credit balance representing the value of the company that has accumulated over time less than any retained and less than any dividends prior to this and we're going to do the opposite thing to it to make it to go down. Then we're going to credit the common dividends payable which is going to be a liability we owe this money we're not crediting cash yet we haven't yet paid it we're going to credit the payable. So if we record this then we see that the retained earnings has a debit balance we're going to record this 120 to it I mean it's retained earnings as a credit balance we're going to record the debit to it which will make it go down. We're reducing the the accumulation of earnings over time less the amount that has been distributed or declared at least at this point. The other side going to the zero amount of the payable common dividends payable at zero it's going up in the credit direction by 120 to 120. So here's our transaction we increase or we decrease the retained earnings and we said we have a payable. Note what we have not done we haven't done anything to net income here so nothing nothing is happening to net income this is going to be very similar to basically a draw that we would have for a sole proprietorship or partnership where we would debit the draw typically to another account but still an equity account and then we would credit cash but in this case because it's more bureaucratic we haven't paid the cash yet and first need to debit or credit the common dividend payable. So instead of crediting cash right away we got to first say hey we've committed to this and credit the payable. So what is happening now is we've said we we're going to reduce the retained earnings at this time because we've committed to it and then we're going to say that we haven't yet paid it we're going to pay it at a later time then when that later time happens we're going to pay it off. Now note there's a there's a period in between that we're going to have to determine you know who's going to get paid like so we have to say what date on what date are people actually holding the stock that are trading all the time going to get paid. There's no transaction related to that point in time we just have to know who we're going to pay basically stocks are trading all the time who owned it at this point in time that's who's going to get paid then we're going to pay it at some point in time that's going to record another transaction when we pay it we're going to pay it with cash so cash has a debit balance we're going to make it go down we're going to pay the 120 that we owe to the stockholders based on the dividend we already recorded the other side's going to be the common dividends payable this payable 120,000 just like any payable we owe it it's a credit balance we need to make it go down because we're going to pay it so we'll do the opposite thing to it a debit so if we post this out then cash let's have this credit we've got the 1,388 going down by 120 credit to 1,268 and then we've got this payable here the 120,000 it's going down by 120 to zero so now the dividend has finally been paid the payable is back down to zero so the full transaction what in essence happened here is we reduced the retained earnings we reduced the equity section and we paid out the money to the owner just as we would for any kind of payment if it was a sole proprietorship or a partnership however instead of paying just one partner or one owner we're paying the corporation stockholders in accordance with their shares the payments to them all being the same in accordance with their shares whoever owns a stock gets a $2 payment for however many stocks that they own so if we look at the stockholders equity section then again we've got the common stock $5 par par value we've got 150 authorized we have 120 shares still out there this didn't change we've got the 600,000 nothing changed there we haven't had any more investment and we haven't like sold any stocks the paid in capital no effect on the paid in capital so that investment portion didn't change what did change is the retained earnings the accumulation of revenue what we've earned over time less what we have paid out to the owners that is is that a number that's going down when we pay out this information so just remember that when we talk about a corporation we usually break it out between the investment and the retained earnings the retained earnings is what we're going to pay out of when we give the dividends which are similar to draws we're not going to give the dividends from the initial investment from the from the net initial investment from the purchasing of the stock we're going to pay it out of the accumulation of earnings over the life of the business so we're at total earnings of $1,248 and again remember what that means it just means that if we only had one person owning all the stock of the corporation then we would have the 600,000 plus 110,000 plus the 538 we would owe that owner that total amount 1,248 300 and 538 would be from earnings 710 would be from the investment that that owner put in when purchasing the stock this number being equivalent to the 1,268 minus the 20,000 or assets minus liabilities