 A dividend is a distribution to stockholders on a proportional basis. The most common type of dividend is a cash dividend, but it could also be a property and stock dividend as well. The focus of this video will be accounting for cash dividends. The Board of Directors decides whether or not a company will declare a dividend, since they are the body representing the shareholders. However, in order to declare a cash dividend, a company must have enough retained earnings and enough cash. There are three important dates when it comes to dividend payments. The first is the date of declaration. This is the day the company announces the dividend details. Dividends are not liabilities until this day. In fact, they are possible contingent liabilities until the date of declaration. The next important date is the date of record. This is usually a few weeks after the date of declaration. The purpose of the date of record is to establish which shareholders will receive a dividend. Only shareholders at the close of business on the date of record receive a dividend. Finally, the date of payment is the day the dividend checks are mailed out. Again, this is usually a few weeks after the date of record. This slide shows the journal entries made on each of these important dates. The date of declaration results in retained earnings being debited and dividends payable being credited. You can see why this is the day a liability exists because the liability account is used in this journal entry. There is no journal entry for the date of record. Finally, the date of payment is a debit to dividends payable and a credit to cash. So let's look at an example. On December 1, the directors of Hazy Fantasy Corporation declared a $1 per share cash dividend on 100,000 shares of one penny par value common stock. The dividends are payable on January 20 to the shareholders of record on December 22. Assume Hazy Fantasy has no preferred stock. You can see the three dates highlighted on the slide. So the total amount of dividend is 100,000. I arrived at this by taking 100,000 shares and times it by $1. On December 1, retained earnings is debited and dividends payable is credited for $100,000. No journal entry is recorded on December 22 as none is required for the date of record. On January 20, dividends payable is debited and cash is credited for $100,000. But what if Hazy Fantasy also had preferred stockholders? Well preferred stockholders get paid all dividends they are entitled to before common shareholders get anything. When learning about preferred stock, there are two terms you want to be familiar with cumulative and non-cumulative. When preferred stock is cumulative, and this is the most common type, these stockholders must be paid any unpaid prior year dividend, which is called dividends and arrears, before common shareholders receive dividends. When preferred stock is non-cumulative, and this is somewhat rare, these stockholders are only paid the current year dividend. Any unpaid prior year dividends are lost. This slide shows how to calculate the maximum preferred stock dividend. Generally, the maximum dividend is shown either as a percentage of the stock value, like the first example, or it lists the amount of dividend per share as shown in the second example. Let me show you what to do with this information. Here is an example of a company that has both preferred and common stock. We are asked to split the total dividend between them. I find it easiest to list the information in a simple table as I've shown here. I list the year, the total dividend declared, the maximum preferred stock dividend, the actual preferred stock dividend, this is the amount the preferred stockholder will get, I list a column for dividends and arrears, and finally I list the actual common stock dividend, this is the amount the common shareholder will get. Finally in this example, the total dividends declared is $5,000 in 2015. The next step is to figure out the maximum preferred stock dividend, which I calculated is $8,000, you can see the calculation at the bottom of the slide. Since the maximum dividend is greater than the dividend declared, the preferred stockholder will have dividends and arrears. In this example, the preferred stockholder will receive all $5,000 of the declared dividend and have $3,000 dividends and arrears, and the common shareholder will receive no dividends in this year. So what if the following year the company declares a $15,000 dividend? Our steps would be the same. We would calculate the maximum preferred stock dividend is $8,000 plus any dividends and arrears. So the maximum preferred stock dividend in this year is $11,000. Note that had this been non-cumulative preferred stock, the maximum preferred stock dividend would have been $8,000 because the dividends and arrears would have been lost. Only that leaves $4,000 for the common stockholder and you can see the journal entry to how to record that.