"Common stock dividend distributable" appears in the stockholders' equity section of a company's balance sheet. This account represents stock dividends that a company has announced, but has not yet distributed to its shareholders. Unlike with cash dividends, companies account for stock dividends entirely within stockholders' equity accounts, with no effect on assets or liabilities.
Read More: How to Close a Dividend Account
Basics of Stock Dividends
Dividends are a company's way of sharing its profits with its shareholders. Companies typically pay dividends in cash, with shareholders receiving a certain amount for each share they own. But companies can also pay dividends in the form of additional shares of stock.
Instead of getting 25 cents per share, for example, shareholders might get one new share of common stock for every 10 shares they own. Stock dividends, just like cash dividends, must be accounted for on the balance sheet.
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Importance of Balance Sheets
A balance sheet classifies all of a company's financial matters in three broad categories: assets, liabilities and stockholders' equity, which is the company's value to shareholders after accounting for liabilities. The stockholders' equity section has two main elements: paid-in capital, which consists of money the company has received from selling shares to the public, and retained earnings, which is the company's accumulated profits.
The total value of the assets always equals the combined total value of the liabilities and the stockholders' equity – that's what makes the balance sheet balance.
What's a Dividend Distributable?
When a company declares a dividend in the form of common stock, it takes the market value of the shares to be distributed and places that amount in a special stockholders' equity account called common stock dividend distributable. At the same time, it reduces retained earnings by an equal amount.
When it actually distributes the dividend shares to stockholders, the company shifts the value of the dividend from the common stock dividend distributable account to its paid-in capital accounts. No money has actually changed hands, and the total value of stockholders' equity hasn't changed.
The company is simply reclassifying amounts within stockholders' equity. In essence, the company is buying shares from itself with retained profits, then giving those shares to the stockholders.
Comparison With Cash
Compare the handling of a stock dividend with what happens when a company pays a cash dividend. In the latter case, money actually changes hands, so the dividend creates a financial liability for the company. Assume, for example, that a company declares that it will pay a cash dividend totaling $5 million.
First, it takes $5 million from the retained earnings account and places it in a liability account dividends payable. When it comes time to distribute the dividend, the company pays it with $5 million in cash. It does so from the asset side of the balance sheet, and eliminates the $5 million dividends payable liability. The end result is that assets and equity have each declined by $5 million, so the balance sheet remains in balance.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.