Receive board approval
In order to pay out dividends, the company’s board has to approve of the payments. Board members assess the finances of the company and the proposed dividends before holding a vote. If the board approves of the dividends, they set both a record date and a payment date. In order to be eligible to receive a dividend payment, a stockholder must be an owner on the record date, which means if an owner sells shares between the record date and payment date, the original owner receives the dividend, not the purchaser.
Record the dividend as a liability
As soon as a dividend payment is declared, list it as a liability on the company’s financial records in the dividend payable account. After the board approves a proposed dividend payment and sets a payment date, calculate the total cost of the dividend by multiplying the amount being paid per share by the total shares being paid out.
Distribute dividends
Make payments to all shareholders who owned qualifying stock on the payment date ratified by the company board. After making payments, update the dividend payable account by removing the liability from the records to show that you have settled the dividend.
Record deductions
With the liability removed from your books, you need to make a permanent record of the dividends. Record the cost of dividend payments equal to the liability calculation in both the company’s cash reserves in your asset records and your retained earnings in equity records.
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