Question

What are dividends and how are they recorded? What is the primary difference between a cash dividend and a stock dividend?

Answer 1

Dividend is a way of profit sharing with the investors. Usually, a mature company once it finds difficult to generate additional return through diversification or new project prefers to opt the dividend way and return the profit earned to the investors. Dividends are not guaranteed. If a company is not growing or funding is a problem, dividends are stopped.

Dividends can be in different form such as cash dividend (where cash is distributed to the shareholders) and stock dividend where additional stocks are issued to the existing stockholders (it can be like 1 stock for every 4 stock or even 1 stock for each stock)

A cash dividend involves two entries. In first entry the account Retained Earnings is debited and Dividends Payable is credited for the amount of the dividend that will be paid