This video shows how to record a journal entry when a company declares dividends. If the company declares a cash dividend and immediately pays it, you debit the Dividends account and credit the Cash account. If the company declares a cash dividend but does not immediately pay it, you debit the Dividends account and credit Dividends Payable. When the dividend is later paid out, you debit Dividends Payable and credit the Cash account. The Dividends account is a temporary account and is therefore closed out to Retained Earnings at the end of the period. This closing entry decreases Retained Earnings (and thus, Stockholders’ Equity).

If the company declares a $500 cash dividend and immediately pays it, you debit the Dividends account and credit the Cash account.

Journal Entry to Record Cash Dividend:
Dividends $500
               Cash $500

If the company declares a $500 cash dividend but does not immediately pay it, you debit the Dividends account and credit Dividends Payable. When the dividend is later paid out, you debit Dividends Payable and credit the Cash account.

Journal Entry to Record Cash Dividend Declared:
Dividends $500
               Dividends Payable $500
Journal Entry to Record Dividends Paid:
Dividends Payable $500
               Cash $500

The Dividends account is a temporary account and is therefore closed out to Retained Earnings at the end of the period. This closing entry decreases Retained Earnings (and thus, Stockholders’ Equity).