As stated above, the formal resolution declaring the dividend prescribes where it shall go, so there can be made up a list of those to whom the dividends are to be paid. To accomplish this it is usually stated that the stock records for transfer of stock ownership shall be closed between certain named dates and that dividends will be paid to those who appear as shareholders as on the initial date of the closed period. This makes it possible to bring the stock record up to that date and determine who are owners at that time. Thus, a dividend resolution may read somewhat as follows:
A dividend, No. 94, of two and one-half per cent (2½%) for the quarter ending March 31, 1918, has been declared by the Board of Directors out of past earnings, payable April 1 to stockholders of record at the close of business March 23. Stock transfer books will be closed from March 23 to April 1 inclusive.
The stock records may, however, remain open, the matter being one of convenience only.
If a transfer of stock should take place subsequent to the named date of record, sale is usually made ex-dividend. If, however, sale should be made with right to the dividend, notification of the assignment of the dividend before the mailing of the dividend checks by the secretary or treasurer constitutes an order for him to pay the dividend to the new party. The same rule would obtain in the case of a sale made previous to the declaration of dividends but not recorded till afterwards; so also in the case of pledged stock, although payment should be made to the pledgee. Unless the corporation is notified, its list of stockholders according to its records governs in determining the owners of the dividend.
Accounting Record
Little need be added to what has been said in other places as to the method of handling dividend transactions on the books. Their declaration is booked as a charge against either the current Profit and Loss or the Surplus account, with a credit to Dividends Payable. Their payment by any of the methods already discussed in this chapter cancels the Dividends Payable account and is reflected either by a decrease of assets, an increase of liabilities, or an increase of proprietorship. In setting up the entries, ample explanations should be made in the record itself or by reference to the minute book.
As to handling the payment of the dividend, methods vary somewhat. The secretary’s list of stockholders made up from the stock records should show the stockholders according to the kinds of stock they hold, the amount of the holdings of each, the dividend rate on each class, and the amount of the dividend payable to each stockholder. This list, with its calculations verified by the treasurer, is the schedule according to which the dividend checks are made out. Where a separate series of checks is made out for this purpose, it is best to draw a check on general cash for the full amount of the dividend and deposit it to dividend account with the bank. The individual dividend checks are drawn against this account and so the detail of the transaction is kept off the general books.
If all checks reach their destination, the dividend liability is canceled. If any are unclaimed, a liability exists on account of them offset by funds appropriated and set aside for its cancellation. If the fund is in the hands of a trustee—which is not usual—and so beyond the control of the corporation, there would be no reason for including the liability on account of such dividends on a balance sheet as of that date. Under most circumstances, the cash in the fund should be counted as cash on hand and the liability shown. When in this way an unexpended balance of cash is shown in dividend account, subsequent charges against it must be carefully watched to see that they are properly authorized, otherwise the way to fraudulent practice is opened.
Relation of Capital Losses to Dividends
Reference was made in Chapter XXII on “Profits” to the relation of capital losses to dividends. The laws are very explicit in their declaration that dividends shall not be paid out of capital. In this connection two problems treated in Chapter XXII must be reconsidered. Here it is purposed simply to restate them and summarize conclusions. These problems are: (1) the interpretation of the law’s requirements in relation to the payment of dividends without providing for the depletion of wasting assets; and (2) the bearing of the law on dividend payments without making good all previous encroachments on capital.