 In this presentation, we will record a journal entry related to cash dividends for a corporation. Information on the left side, we're going to record that into the general journal here and then post that not to the general lecture but to a worksheet to get a quick example of what will happen to the accounting equation and individual accounts. Our trial balance is assets and green, liabilities and orange, then the equity section light blue and the net income in dark blue. Note there's nothing in the net income at this point in time. It's going to be just a short trial balance to give us an idea of something in balance so that we can post things out and see the effect that would be on the individual sections of a trial balance. Of course here we're focusing in on what is different for a corporation that being the equity section. The debits are going to be non-bracketed or positive. The credits will be bracketed or negative for Excel and that shows that the debits minus the credits will then equal zero or that zero representing debits equal the credits. So we're going to post this information here and we're going to have a dividend. We're going to have the dividend declared and then we are going to pay the dividend. Now for a corporation it's important to know what is a dividend before we take a look at this. There's a $2 cash dividend. How does a dividend compare say to a partnership or to a sole proprietor? The dividend represents the accumulation of earnings that are going to be paid back. So for a partnership if I was a partnership or a sole proprietor then our business would earn money hopefully and at some point we would accumulate cash by through that earnings and then we can take that out in the form of a draw. From a partnership or a sole proprietor we can decide whenever we want to do that to do that and take it out with a draw. With a corporation however because all the stockholders are the same and they all kind of get some voting power in the stock then it's not as easy for any individual owner to just take out money because we don't have a capital account for each individual owner. All the stocks are the same. So in other words because all the stocks are the same if we give some money to an owner we have to give the same amount to all owners. So we have to have some standardized process then therefore for something like a draw which is a dividend for a corporation to be given and so there's got to be we have to agree on the dividend so there's kind of a bureaucratic process to issuing the dividend. So that means it's going to have a three step kind of process to give out the retained earnings the accumulation of earnings less what's been distributed less dividends. So we're going to take what's been earned and retained earnings and we're going to give some of it back in accordance with what the corporation has decided to do. We're not going to take it out of the investments which is represented by the common stock and paid in capital. That's one reason we really want to break out the investments versus the earnings that have been accumulated and not distributed for a corporation. So that's what we're going to do so to do that we basically have to the corporation has to first decide that they're going to give a dividend and once they do that then they've basically created the intent and therefore the liability to distribute the dividend. Then the corporation has to decide when you know that the people holding that dividend who's going to get the dividend what if people buy and sell stock we need to make sure that we know the point in time for which the dividend payments are going to be paid to whom. And then we need to actually pay the dividends at some point in time. So there's really three dates that are happening here. There's really two dates that we need to know in terms of recording journal entries when we declared it and then when we pay it. And because of the bureaucratic process they won't be typically the same day. So if we declare the dividend we're going to say that there's a $2 share cash dividend. So first question is cash affected at the beginning. No it's not affected because we're not going to pay it yet. This is just us making the dividend we in essence owe the dividend. Now typically I would go to then what did we receive but and here we're distributing so that the other you know what really happened is that we owe the dividend we're going to owe it in the future. Cash isn't paid yet but we've declared we've made a commitment. So what we're going to record is a liability. We have a common dividend payable. We've said hey we're going to do this. This is going to happen. We've got a payable. We've incurred a liability. We have kind of a liability that we've told ourselves. We as a separate entity to the owners owe the owners money. So we have this payable account here. It's a liability. We're going to make it go up by doing the same thing to a credit. So I'm going to copy it right click and copy that liability. I'm going to put it on the bottom. So I'm going to put it here in B3. Right click and paste 123. And that credit, we'll see what the other side's going to be first. The other side it's going to come out of retained earnings. And we could put another account called dividends and similar to draws account and then close it out to the dividends account in a closing process. Or we may just take it directly out of retained earnings. So for this example we're just going to take it out of retained earnings. We're going to reduce retained earnings. This is the accumulation of revenue over time. And then we're going to distribute that to the owners eventually through the cash. Currently go into a payable that we'll pay it later. So this has a credit balance. We're going to make it go down by doing the opposite thing to it, a debit. So I'm going to right click on that, copy it, put that up top in B2. Right click and paste 123. Now how much are we going to pay here? So if we just look at our information here, we've got common stock, $5 part, $600,000, I don't see how many shares are outstanding. So, but we could do that because there's a par value. We could figure that out by taking the $600,000 and dividing by the par value of $5, giving us 120,000 shares. That's the beauty of the par value. It makes it easy for us to standardize this number and work with that number even though we got paid something over and above for the initial investment. So I'll do that same calculation here in C2 where we will say equals $600,000 divided by $5,000 and enter $120,000. Then we're going to have a credit for the same amount. I'm going to do that with a negative of this number. You could just put negative 120. I like to use the formula whenever possible. So there's our first journal entry. So I'm going to record this. Here's retained earnings. Here's retained earnings down here. We're going to be in cell H15 where we will say equals point to that 120,000, bringing the 658,000 down by 122,538,000. And there's the common dividend payable. Should be like common stock dividend payable. Here it is here, a liability. We are in cell H10 where we will say equals point to that 120, bringing the balance from zero up by 122, 120. So we're back in balance here. Debits equal the credits. Note what has happened. Liabilities went up because we've basically now told ourselves, we've committed to paying this to the owners. And the corporation now is committed to doing so, owing a future $120 cash dividend to the owners. The other side is not an expense not reducing net income because it's not something that we are incurring in order to generate revenue. This has nothing to do with the performance of the business, how the business is doing. So we're not going to lower net income with an expense. What we're going to do is take it out of the retained earnings, take it out of the equity section, as we would if it was a draw for a sole proprietor or partnership. So we're just reducing the retained earnings. So retained earnings was at 658,000, the amount of earnings that have been accumulated over the life of the business, less any distributions we had prior had. And then we're going to reduce it to 538,000. So that's going to be our transaction. Now sometime in the future, of course, we are then just going to pay off the common stock with cash. So in that journal entry, cash will go down. Cash is a debit balance. We'll do the opposite thing to it and credit it. So I'm going to copy cash, right click F7. Going to go back up top and put that on the bottom. I'm going to skip one line, then skip another line to put it on the bottom here in B6. Right click and paste 123. The cash we're going to pay in D6 will just be the 120 that's in there. So I'm just going to put a credit 120,000 and enter. We're going to debit something 120,000. So I'm going to put a negative of that number. You could just type 120. I like to use the formula. And then that's going to, of course, just be the common dividends payable. Has 120 in it, it's going to go down. We're going to do the opposite thing to it, debit it. So I'm going to right click and copy, put that up top in B5, right click and paste 123. Then we'll record this to our trial balance. So here's the 120 common dividends payable. Here it is on the trial balance. We want to be in cell H10, double click on it, go to the end of it, plus point to that 120, bringing the 120 down to zero. Then we're going to go to cash. Here's cash. Here it is on the trial balance. We want to be in H7, where we will say equals. Point to that 120, bringing the 1,388,000 down by 122, 1,268. That then brings us back in balance. Note there's still, there's no effect on net income. Even though we paid the cash at this point in time, we didn't pay the cash in order to help generate revenue. It has nothing to do with the performance of the business in terms of revenue generation. All it has to do with is us paying the owners for some of the accumulation of revenue, which we had decided to do in the past and therefore created a liability, which we are now paying off with the cash. If we look at our stockholders' equity then, a little format here, we can say once again, the most confusing piece is really the stockholder equity components here, which we're going to say that there's $5 par value, 150,000 shares authorized. How many shares are outstanding? Well, that didn't change because we didn't change how many shares we sold. It was 600,000. That's how much money is in the common stock. And they're all standardized $5 per shares, what we sold them all for. Therefore, 120,000 commas. And then we're going to just bring over these dollar amounts. So in M10, I'm going to flip the sign, I'm going to bring that 600 over, but flip the sign. So instead of equals, I'm going to put negative of that 600 and enter. Additional paid in capital, I'm going to bring this over and flip the sign. So rather than equals, negative of that number. And then we'll add them up so I can see the difference between the amount that has been invested versus the retained earnings. So here we're going to say equals the sum, double click the sum of these two. And then we're going to pull over the retained earnings, which has differed now. This is the accumulation of revenue less the distributions, the dividends over the life of the company. So in N12, negative of the retained earnings, 538. And then we're going to add these up equals the sum of the 710 and the 538 or 1,248. This representing the net value of the company, what is owed to the owners, also representing assets minus liabilities, 1,248,000. If there was only one person that owned all the corporate stock in theory, the corporation would owe them or he would have or she would have a net worth, 1,248,000 on a book value method. We're going to break that out between how much was invested. So if this was just one person that owned all the stock, they would have invested 710,000 in the company, their original investment. And the company would have earned over and above that original investment less what has been distributed out over the life of the company, 538,000. So in other words, we can distribute 538,000 of the earnings without dipping into any of that 710, which was originally put into the company in order to help generate these earnings.