When a publicly-held corporation has the earnings to justify issuing a dividend to stockholders but does not have the cash, the board of directors may decide to issue a scrip dividend. A scrip dividend is essentially a promissory note to the stockholders in lieu of cash payment on stocks held. Both the issuer of the scrip dividend and the recipient of the scrip dividend should record the transaction on the accounting books.
- Skill level:
Things you need
- General ledger
Create a Notes Payable to Stockholders account in the Payables section of the general ledger.
Decrease the Retained Earnings account in the Equity section of the general ledger by the total amount of the scrip dividends issued. Generally Accepted Accounting Principles (GAAP) considers a decrease to an equity account a “debit.”
Increase the Notes Payable to Stockholders account by the total amount of the scrip dividends issued. GAAP considers an increase to a payables account a “credit.”
Create a Dividends Income account in the Extraordinary income section of the general ledger. Because dividends received do not represent income from operations, you should include dividend payments in the extraordinary income section.
Create a Scrip Dividends Receivable account in the Asset section of the general ledger.
Record the total value of the scrip dividend received as an increase to the Dividend Income account. GAAP considers an increase to an income account a “credit.”
Record the total value of the scrip dividend received as an increase to the Scrip Dividends Receivable account. GAAP considers an increase to a receivables account a “debit.”
Tips and warnings
- If you are not certain how to record issuance or receipt of scrip dividends, consider hiring an accounting professional to assist you.
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