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The Corporate Finance Institute Accounting

There are various kinds of dividends that companies may compensate
its shareholders, of which cash and stock are the most prevalent.

Date Explanation Journal Entry

Declaration Date Once the board declares a dividend, the DR Retained Earnings
company records an obligation to pay CR Dividends Payable
through a dividend payable account

Ex-dividend Date The date on which a share trades without No Journal Entry
the right to receive a dividend that has been
declared. Prior to the ex-dividend date, an
investor would be entitled to dividends.

Date of Record The date when the company compiles the No Journal Entry

list of shareholders to receive dividends

Payment Date When the cash is actually paid to the DR Dividends Payable
shareholder CR Cash

Applications in personal investing
With all these debt and equity instruments in mind, we can apply this
knowledge to our own personal investment decisions. Although many
investment decisions depend on the level of risk we want to undertake,
we cannot neglect all the key components covered above. Bonds are
contractual liabilities where annual payments are guaranteed unless
the issuer defaults, while dividend payments from owning shares
are discretionary and not fixed. In terms of payment and liquidation
order, bonds are ahead of preferred shareholders, which are ahead
of common shareholders. Therefore, from an investor’s perspective,
debt is the least risky and for companies, it is the cheapest source of
financing because interest payments are deductible for tax purposes.
However, debt is also the riskiest form of financing for companies
because the corporation must uphold the contract with bondholders to
make the regular interest payments regardless of economic situation.

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