 In this presentation, we will discuss dividends, what they are and how they work. The dividends represent the payment of the corporation to the owners. And it's similar if you're talking about a sole proprietor or a partnership to draws, but it has some very big and significant differences to draws. So first, let's discuss draws and then go to the differences in the dividends. If you're a sole proprietor of a business, we're going to start the business we typically will have an initial investment, then we hope to generate revenue through the business and then of course we're going to start taking money out of the business. When we take the money that we have earned out of the business and we are a sole proprietor or partnership, we call that draws or withdrawals. In other words, when we take that money out it's not an expense of the business. It's something that's just going to come out of the capital account, something that is owed to us. It's not going to reduce net income. It's just money that we're taking out as we keep the business separate from us so that we can track the performance of the business and we can track our personal performance in terms of our personal spending. We're going to take the money out as a draw and then spend it personally. Same kind of thing happens for a corporation of course. We buy stock which is our initial investment into the company if we're the individuals owning the company. We buy stock putting money into the company. We get in return that stock which gives us an ability to vote on things within the company including vote for like the board of directors, people who will then choose the management of the company and we have the ability to receive payments. We receive earnings. That's why we put the money in. We want to get a return on the investment. That return will be similar to draws that we'll get back but we call them dividends. Now there's an important difference between dividends and draws. The corporation has a lot more limitations in terms of how we can draw money out because of the standardization of the stocks. We can't just say hey I'm a stockholder. I want to draw out some of my money. I've invested this much money. I should have this much you know owed back to me and I know the company made this much money. I would like to get some money back. Cannot do that directly. We can vote to do that but the reason one reason we can't do that directly is because the corporation is trying to standardize all of the stocks to be the same and that means that we can't have different people drawing out different amounts of money because that would make the stock not the same. In other words if we give out money back if we have a draw to the owners in the form of dividends those dividends need to be uniform to all stockholders. So when a corporation makes the decision to have a draw to give money back to the stockholders it's a much more kind of bureaucratic process. So the stockholders have influence through voting to influence the dividends but no individual stockholder like a partner can really just say I want to take some money out in the form of dividends because it'll affect everyone else. The others will need the same distribution in order to keep all the stocks uniform. So there's going to be this bureaucratic process to get the payments. So remember what's happening here is the company's generating revenue. The company makes money and then the money is going to be needed to be distributed to the owners the stockholders just like any business would but the process of distributing the money to the owners is a bit more bureaucratic because of the standardization of the corporate stocks. So how are we going to do this? The board of directors is going to be involved in determining what the dividends will be. They're going to have to determine what those dividends will be and then I go through the process of distributing those differences those dividends. So the decision as to whether we should have dividends then is going to involve a lot of factors. There's going to be certain restrictions. One is that we typically need to have the retained earnings available because remember there's two parts of the equity section in a corporation. One represents basically the investments by the owners the common stock and the paid in capital for the most part and the other represents the earnings that have been accumulated and have not yet been distributed in the form of dividends. When we give out dividends we want to make sure that we're giving them out from the earnings of the corporation over and above the initial investment typically because if we give out the initial investment that could have tax consequences and other consequences. So typically one restriction to the amount of dividends distributed will be hey is there enough retained earnings to do so and then we have to have sufficient cash. Now just because we have retained earnings doesn't mean we have cash because of course the equity section represents the value in the company but on the flip side the assets that we have may be invested in things like equipment and building and land inventory whatever we're doing. So these of course are going to be the two main restrictions that that are going to say hey we can't we can't give a dividend if we don't have the sufficient retained earnings and we can't give it if we don't have the sufficient cash in order to give a cash dividend. That if we do have these two things if we have the retained earnings and the cash to give a dividend the company still may choose not to. Why? Because they may choose to keep the the money for future investments. Now this becomes a bit contentious because if a company has a whole lot of cash and has a whole lot of retained earnings then the stockholders may question and say hey well why aren't you giving a dividend if you're not using the cash to make us the stockholders the owners more money. In other words if the company is not doing anything with the cash to help to generate revenue in the future they're just holding on the cash and they're not like an investment firm they're doing some other thing they're not investing whatever they do principally to make money then the stockholders might say well why aren't you giving us a dividend. However if the management has a good purpose they're saying hey we have a potential purchase maybe we want to merger coming up soon or maybe we want to invest in something we're just saving up the cash to get to the right time in order to make an investment and we're gonna do that for the stockholders by purchasing something and then getting future revenues in the future which will generate more revenue more cash and more value in the company. The process of giving out the dividends will typically include three dates and this has to do with that kind of bureaucratic process that we have. Remember that's no individual stockholder if I own one stock I cannot go to the company and say basically I need to get a distribution I need to get a draw I need to get a dividend individually because all the stocks need to be the same all we can do is say hey we want to vote for a dividend or we want to give pressure to the company to declare the board of directors to declare to give a dividend once done that give it that dividend will be given not just to me my one share it'll be given to you all of the people that own stock it has to be uniform it has to be uniform so in order to do that we're gonna basically have a bureaucratic process three dates involved now when we look at these three dates remember that there's only two dates that actually have journal entries which can be confusing so the dividend process will have three dates but transaction wise in terms of financial transactions we will only have two dates in other words two journal entries that will be recorded along this process one the date of declaration that's gonna be when we declare the dividend and so with the board of directors gets together and say hey we're gonna have a dividend at this point in time and it has been declared and therefore it will be done what happens in terms of a transaction at that point in time is that we're gonna we're basically saying hey we've committed ourselves to give money to the stockholders out of the company we've committed ourselves to do that so we're gonna we can record the fact that that that's taking place we can record the dividend happening or the retained earnings going down but the money has not yet gone out of the company yet because we haven't actually distributed the cash yet so we've incurred a liability we've got a liability related to the dividends that we owe at that point in time and we've we've committed it and therefore the retained earnings is going to go down the value of the company is going to go down represented by the equity section represented by the retained earnings we're gonna record the dividend half then we're gonna have the date of record this is the one that doesn't have a journal entry yet and and this is the idea that we need to have some date to know who owns the stock and who will get the dividend at that date at that date in other words the stockholders have the freedom to buy and sell the stocks whenever they want because they're just like coins like tokens they can buy and sell the stocks all they want and we what we need to know them is who you know when are we gonna who are we gonna pay if there was a stock sale that happened between the date of declaration and the date of payment then we need to know okay what date are we gonna use as the as the line to pay whoever owns the stock as of that date that's the date of declaration so we're not gonna have any transaction on that date we're just gonna say hey you have to own the stock on this date you gotta have the stock certificate here if you sold it before that someone else owns it at that point they're the ones that's gonna get the dividend and then we have to have the date of payment which of course which will also have the journal entry and so that's gonna be the cash is gonna go down we're actually paying the cash from the company to the owners and then the other side is gonna be that liability that we created up here so we created the liability up top when we had the date of declaration we actually recorded the decrease of retained earnings up here now we're just gonna pay off that liability notice what's not happening on any of these dates the income statement is it is not affected where this is just like a it's similar to a draw in that we're just taking the earnings and giving it back to the owners it's not an expense it has nothing to do with the performance of the company which would be revenue minus expenses just has to do with us taking the accumulation of the earnings of the company and distributing it to the owners in the form of dividends