What you’ll learn to do: account for distributions to shareholders
A dividend is the distribution of some of a company’s earnings to a class of its shareholders as determined by the company’s board of directors. Common shareholders of dividend-paying companies are typically eligible as long as they own the stock before the ex-dividend date. Dividends may be paid out as cash or in the form of additional stock.
While the major portion of the profits is kept within the company as retained earnings in order to be used for the company’s ongoing and future business activities, some profits can be allocated to the shareholders as a dividend. At times, companies may still make dividend payments even when they don’t make suitable profits in order to maintain their established track record of making regular dividend payments.
Unlike a sole proprietor, who can take money out whenever he or she wants to, a stockholder in a corporation has to wait for the board of directors to declare and pay a dividend. In a closely held corporation, where the owner may be the chair of the board and have all decision-making ability, declaring a dividend in order to take profits out of the company can be a simple process (remembering that the corporation paid income tax on the net earnings, and the shareholder will pay income tax on the dividend). However, in a publicly-traded company, or even a non-publicly traded company with many shareholders, declaring a dividend may be much more difficult, as it takes an action of the board of directors.