Dividends payable is a liability of the firm for the cash dividends owed to shareholders. Suppose a company's board of directors on August 1 declares a quarterly dividend of $1 for each of the firm's 500,000 outstanding common shares, which is payable on August 25 to shareholders of record on August 15. On August 1, the dividends payable account is credited for $500,000 and retained earnings is debited for $500,000. On August 15, dividends payable is neither debited or credited. When dividends are paid on August 25, dividends payable is debited for $500,000 and cash is credited for $500,000. Because dividends are usually paid quickly, dividends payable is classified as a current liability on the balance sheet. Dividends payable is different than other current liabilities, since dividends payable represents funds the owners owe to themselves. Nevertheless, from the standpoint of the company as an economic entity, dividends payable do represent a legal obligation like any other. |
