 Hello and welcome to this session. This is Professor Farhad and this session we would look at cash dividend. This topic is covered in introductory accounting course as well as intermediate and the CPA exam. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance and tax lectures covering all these courses. If you like my lectures, please like them, share them, subscribe. If they benefit you, it means they might benefit other people, so share the wealth and connect with me on Instagram. On my website, farhadlectures.com, you'll have access to additional material such as practices, true, false, multiple choice, the PowerPoint slides. And if you're studying for your CPA exam and you're trying to get those extra 10 to 15 points, check out my resources on my website. So let's talk about cash dividend. So what is cash dividend? Well, here's how it works. Investors invest money in the company. They expect in return to be rewarded. So how are investors rewarded? It goes something like this. The company generate revenues of a million. They will incur costs and expenses of 400,000. And the company will generate a net profit of 600,000. This is the profit. Now what's gonna happen is this. At some point, the company will decide to reward the investor. What does it mean reward? It means you want somehow or another compensate them, reward them because they took a risk because the investors are the owners of the company and the company made that profit. So if the company can use this money internally for the good of the company and the investors, they will. Otherwise they are going to distribute this profit. So after we make the profit, after we make the profit, this profit technically first sits in an account called, hopefully you remember this, retained earnings. And that's called the profit net income to be consistent with our terminology, net income. So the company made a profit or net income of 600,000. Now, what can we do with this retained earnings? Well, we can keep it. Right now we're keeping everything. Retained earnings 600,000 or we can distribute some of it to the shareholders. When we distribute retained earnings to the shareholders, it's called dividend. And usually we give them cash. It doesn't have to be cash. You're gonna see in the next session, we might give the shareholders stocks rather than cash. But this is the idea of a dividend. So cash dividend provide a return to investors, to shareholders and almost always affect the stock market value. So it does have effect on the stock market value. I'm not gonna go into how. Usually it's positive, especially if we keep on increasing the dividend. But this is the idea of a dividend. Now we're gonna see exactly how it works, okay? From a journal entry perspective. So first, to pay dividend, you have to have the cash and you have to have retained earnings. Because remember, dividend comes out of retained earnings. That's the idea. The idea is you are rewarding the investors from the profit that the company generated. The profit sits in retained earnings. So we need both cash and retained earnings. Now not all companies pay dividend. For example, 76% of companies, they pay cash dividend to common shareholders and 22% pay another type of dividend preferred, which is we don't worry about preferred in the session or in the scores because the preferred dividend is a different type of stocks, which is preferred stock. But the point is not all companies pay dividend. Simply put, when we pay dividend, the company decides that they want to pay dividend. So what do we need to know about dividend? We need to know about three important dates. The first date is the date of the declaration. On the date of the declaration, the company record a liability for dividend and simply put what happened, the board of directors, decides to pay dividend. Let's go back to that example here and I'll remind you, we made a profit of 600,000. You guys remember, we had in retained earnings 600,000. Let's carry on with this example since we already used this number. So the company met and they said, well, we have retained earnings right now of 600,000. Let's distribute half of it. Let's distribute half of the retained earnings to our shareholders. If they decided to do so on this date, they will reduce retained earnings. So they will debit retained earnings for the amount, which we said 300,000. So they will debit retained earnings. Let me use a different color. So they're gonna reduce retained earnings by 300. Now what's left in retained earnings is the remaining 300. And they will credit an account called dividend payable. So simply put, they create a liability. On the date of the declaration, that's the first date, the board decides they're gonna pay dividend and they create a liability. On that date, also they determine another date, another two dates. So today's date is April the 13th. So this is today's date. This is April the 13th, so we can use dates. April the 13th. Then on this date, this is called the declaration date. They determine the date of record. And let's assume the date of record is four, just making this up, 425. April 25th is the date of record. Now what is the date of record? There's nothing you do from an accounting perspective on the date of record. On the date of record, you collect the names of companies of individual, their social security, their EIN, if it's a company, their address, their bank information, if you're gonna send them the money, direct deposit. So you collect this information. Who owns the stock on that date? So if you are on record, on April the 25th, if you own the stocks, April 25th, guess what? On May 1st, on May 1st, you're gonna get your money. The third date is the date of payment. I decided to be May 1st, on May 1st. On this date, we distribute the money. So on this date, the individual get paid. And what entry do we make on this date? We debit the liability. We debit dividend payable 300,000, this account here. And obviously we pay them cash. We credit cash 300,000. So those are the three dates and the two journal entries. Notice I said two journal entries because you don't do anything on the date of record. The best way to illustrate this is to work another example. On January 9th, a $1 per share cash dividend is declared. So January the 9th is the declaration date. We're gonna pay $1 per share. We have 5,000 shares outstanding. So let's go ahead and record the entry on January the 9th. This is the date of date, declaration date. We record a liability. We debit, we reduce retained earning and we credit dividend or common dividend payable. The dividend will be paid on February 1st. That's the payment date to stockholders on January 22nd. January 22nd is the record date. February 1st is the payment date. Let's go ahead and see what happened on those two days. No entry on January the 22nd. Remember on January the 22nd, we collect the information about the shareholders. Their addresses, their names, so we can send them the money. On the payment date, February 1st, we debit. This accounts to remove the liability. We remove the liability and we credit cash. And those are the three dates that you need to know for cash dividend. Sometime we might have a deficit. Deficit is when we have a debit retained earnings. Remember we have retained earnings. Retained earnings should have a credit balance. Sometime we might have a debit balance. So when we have a debit balance, it means we have a deficit. A deficit is created when the company incurs losses over the years, cumulative losses, or pay dividend greater than the total profit earned in other years. Or they pay more dividend. For example, they made 600,000. Remember the company made 600,000. And they decided to pay 800,000. Well, when they do so, when they pay more retained earnings might go into negative or a deficit. And for tax purposes, we have to deal with it separately. It's beyond the scope of the scores. Just know that a deficit retained earnings means the retained earnings has a debit balance. And it's shown on the financial statement as a negative. Notice here, the 6,000 is negative, 6,000. It's a deficit. Notice it's a red deficit. And companies do have deficits because if they incur losses, then the losses will have to be debited to retained earnings. And as they incur more losses, retained earnings becomes a deficit retained earnings. If you like this recording, please like it, share it, subscribe to the channel. And please visit my website. If you're looking for additional resources to pass your CPA exam, improve your grades, those 10 to 15 extra points, 10 to 15 extra point to put the exam behind you. The CPA exam is a lifetime investment. Take it seriously, pass the course, move on, study hard, and stay safe, especially those coronavirus days. And the next session, we would look at stock development.