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6 Statement of Changes in Equity

Linking the Income Statement to the Statement of Financial Position

Jacqueline Gagnon


A lightbulb brain in a circle—the 'think' section of the think-see-do approach.


I want to distinguish here between dividends declared and another account you may see on a trial balance: dividends payable. The dividend process goes like this:

Dividends are declared.
This means that the company has suggested a dividend to the board of directors, and the board has approved the dividend. Shareholders have not received any cash. At this time the following journal entry is entered into the accounting system.
(to record approval of dividends)
DR Dividends Declared
CR Dividends Payable
Dividends are recorded.
All shareholders on record at this date will receive a dividend. Administrative processes are at play here, determining how much each shareholder will get paid and getting ready for dividend payment. There is no journal entry necessary on the dividend record date.
Dividends are paid.
Now that the administrative process has determined who gets paid, the dividend actually gets paid out. Cash leaves the company and is transferred to shareholders. At this time, the following journal entry is entered into the accounting system.
(to record payment of dividends)
DR Dividends Payable
CR Cash

There are two accounts with dividend in the title: Dividends DeclaredDividends Declared:
A dividend has been approved by the board of directors. Shareholders may or may not have received cash. Dividends are recorded when declared as DR Dividends Declared and CR Dividends Payable.
and Dividends PayableDividends Payable:
A current liability account that shows an obligation to pay shareholders. Dividends remain in the Dividends Payable current liability account until paid via cash or transfer of additional common shares. Payment of dividends is recorded as DR Dividends Payable and CR Cash or Common Shares.
. Which one is an equity account? You know, the one that makes retained earnings go down on the Statement of Changes in Equity. Yes, Dividends Declared is an equity account. Dividends Payable is a liability account that shows the obligation to pay cash to shareholders.

Dividends Declared holds dividends for the fiscal year, but then they need to be transferred to Retained Earnings. How might we do that? Let’s remember back to the income statement closing entry. You know: the entry that that transferred net income to retained earnings. It went something like this:

DR Revenues and Other Income/Gains
CR Expenses and Losses
CR Retained Earnings

But this wasn’t the whole story of retained earnings, because retained earnings also gets smaller when we pay out earnings to shareholders: dividends. Let’s transfer the balance of dividends declared the same way. It goes like this:

DR Retained Earnings
CR Dividends Declared

This entry zeroes out the balance of dividends declared and transfers the balance to retained earnings.

So, to recap, dividends declared is an equity account that reduces the balance of Retained Earnings and shows up on the Statement of Changes in Equity. Let’s practice these journal entries to get comfortable with the dividend process.


An eye in a circle—the 'see' section of the think-see-do approach.


My Turn:
YeT Corp.’s comparative trial balance shows the following balances for the fiscal years ended 31 December:
Account 20X1 20X0
Dividends Payable 140,000 CR 80,000 CR
Dividends Declared 140,000 DR 80,000 DR
Required:
Prepare all required journal entries relating to dividends for 20X0 and 20X1. For each year, dividends were declared on 31 December, recorded on 15 January, and paid in full on 31 January.

31 December 20X0:

(to record dividends declared for 20X0)
DR Dividends Declared 80,000
CR Dividends Payable 80,000

15 January 20X1:

Dividend record date – no journal entry required.

31 January 20X1:

(to record payment of 20X0 dividends)
DR Dividends Payable 80,000
CR Cash 80,000

31 December 20X1:

(to record dividends declared for 20X1)
DR Dividends Declared 140,000
CR Dividends Payable 140,000

15 January 20X2:

Dividend record date — no journal entry required.

31 January 20X2:

(to record payment of 20X1 dividends)
DR Dividends Payable 140,000
CR Cash 140,000

A gear and a pencil in a circle—the 'do' section of the think-see-do approach.


I am so excited for you to practice two problems on your own! Here is the first.

Your Turn:6—5: NoR

Great work! One more – just for fun 😉

Your Turn:6—6: FoR

You are making good progress. Let’s put it all together now.

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Mastering Financial Statements Copyright © by Jacqueline Gagnon. All Rights Reserved.

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