Cash dividends
In one sentenceA portion of retained earnings that the company decides to pay in cash to its owners or shareholders in proportion to what each owns, after a decision by its competent body.
Simply put
A distribution is not an expense in the income statement; it reduces retained earnings in equity. When it is declared, it becomes a liability of the company until it is paid.
Before distributing, make sure there is enough cash: a profitable company may not have enough cash if its profits are tied up in inventory and customers.
Worked example
A company has 2,000,000 shares, and its general assembly decided to distribute 1.5 SAR per share.
Total distribution2,000,000 × 1.5 = 3,000,000 SAR
On declaration: Dr. Retained earnings3,000,000
Cr. Dividends payable3,000,000
On payment: Dr. Dividends payable, Cr. Bank3,000,000 SAR
Don't confuse it with
Dividend payout ratioThe share of net profit that was distributed, while cash dividends are the amount paid itself.