A dividend is generally considered to be a cash payment issued
to the holders of company stock. However, there are several types
of dividends, some of which do not involve the payment of cash to
shareholders. These dividend types are:
- Cash dividend. The cash dividend is by far the most common of
the dividend types used. On the date of declaration, the board of
directors resolves to pay a certain dividend amount in cash to
those investors holding the company's stock on a specific date. The
date of record is the date on which dividends are assigned to the
holders of the company's stock. On the date of payment, the company
issues dividend payments.
- Stock dividend. A stock dividend is the issuance by a company
of its comman stock to its common shareholders without any
consideration. If the company issues less than 25 percent of the
total number of previously outstanding shares, then treat the
transaction as a stock dividend. If the transaction is for a
greater proportion of the previously outstanding shares, then treat
the transaction as a stock splite. To record a stock dividend,
transfer from retained earnings to the capital stock and additional
paid-in capital accounts an amount equal to the fair value of the
additional shares issued. The fair value of the additional shares
issued is based on their fair market value when the dividend is
declared.
- Property dividend. A company may issue a non-monetary dividend
to investors, rather than making a cash or stock payment. Record
this distribution at the fair market value of the assets
distributed. Since the fair market value is likely to vary somewhat
from the book value of the assets, the company will likely record
the variance as a gain or loss. This accounting rule can sometimes
lead a business to deliberately issue property dividends in order
to alter their taxable and/or reported income.
- Scrip dividend. A company may not have sufficient funds to
issue dividends in the near future, so instead it issues a scrip
dividend, which is essentially a promissory note (which may or may
not include interest) to pay shareholders at a later date. This
dividend creates a note payable.
- Liquidating dividend. When the board of directors wishes to
return the capital originally contributed by shareholders as a
dividend, it is called a liquidating dividend, and may be a
precursor to shutting down the business. The accounting for a
liquidating dividend is similar to the entries for a cash dividend,
except that the funds are considered to come from the additional
paid-in capital account.