From an accounting point of view, shareholders' equity is decreased by the total dividend amount due to be paid on the declaration date, the date on which the board of directors decided that the company's dividend payment will be made to shareholders.
An offsetting "dividends payable" entry is made into the account on the same date. After the dividend amount is finally paid to shareholders, the dividend payable amount shown on the account is reversed and zeroed out.
Cash dividends have no effect on a company's overall income statement. However, they do decrease a shareholders' equity and the company' cash balance by the same amount. The company's balance sheet size is reduced, as its assets and equity are reduced by the total amount paid out to shareholders in dividend payments.
After the Dividend
The company's cash balance is also decreased by a corresponding amount, as dividends payable are entered into the liability account. The entry is no longer present on the liability side of the company's balance sheet once the dividend payments to shareholders have been completed. There is no separate balance sheet account for dividends after they are paid on the declared payable date. Cash dividends are the most popular type of dividend payment. However, some companies may offer stock dividends, where the company pays shareholders in shares of its stock instead of cash.
Shareholders may also have the option to reinvest their dividend earnings through a dividend reinvestment plan (DRIP). Some corporations allow shareholders to purchase additional shares from the proceeds of the cash dividend amounts due on the dividend payment date. A DRIP allows investors to buy shares commission-free and often at a discount to the current share price.
Dividend dates can be some of the most confusing aspects of owning stocks and tracking companies. However, investors should take note of four important dates: the declaration date, the date of record, the ex-date and the payable date.
The declaration date, as mentioned above, is the date a company's board decides to pay a dividend. The date of record is the date by which investors must own the shares of stock in order to become eligible for the upcoming dividend payment. The ex-date, when applicable, is any date on or after which a security is traded without a previously declared dividend, as when a company decides to stop paying dividends. The payable date is the date on which the dividend is mailed out or deposited to clients' accounts. (See also: Declaration, Ex-Dividend and Record Date Defined and Stock Basics: Different Types of Stock.)
This question was answered by Ken Clark.