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A cash dividend is a payment made by a corporation to its shareholders from its profits or retained earnings. It is a way for companies to distribute a portion of their earnings back to the investors. Cash dividends are generally declared on a per-share basis, meaning each shareholder receives a specified amount of money for each share they own.

For example, if a company declares a cash dividend of $2.10 per share and a shareholder owns 1,000 shares, the shareholder will receive $2,100 in cash dividends. Calculating the total cash dividend involves multiplying the dividend per share by the total number of shares outstanding. This is important because it directly affects the company’s retained earnings.

Once the cash dividend is declared, the company needs to make a journal entry to reflect this decision. The entry involves debiting the Retained Earnings account and crediting the Dividends Payable account until the dividend is paid out.

Unlike a cash dividend, a stock dividend involves distributing additional shares of the company to shareholders instead of cash. These are typically declared as a percentage of the current shares owned by shareholders, increasing the number of outstanding shares without affecting the company's cash flow.

In our example, a 5% stock dividend means shareholders receive 5 additional shares for every 100 shares they hold. The total number of shares to be distributed is calculated by multiplying the existing shares by the dividend percentage. The stock dividends are valued at the market price on the declaration date to assess their monetary effect on financial statements.

When declaring a stock dividend, the company needs to create a journal entry that changes the Retained Earnings account while accounting for the Common Stock Dividends Distributable and any Paid-In Capital in Excess of Par Value. This recognizes the par value of new shares alongside any additional value from the market price, adjusting the company’s equity accounts accordingly.

Journal entries are essential in accounting to record all financial transactions in a company’s books. For both cash and stock dividends, proper journal entries ensure that the impact on financial statements is accurately recorded.

When a cash dividend is declared, the journal entry involves debiting Retained Earnings and crediting Dividends Payable. This entry recognizes the company's obligation to pay shareholders. Later, when the cash dividend is actually paid, the Dividends Payable account is debited, and Cash is credited to show the outflow of cash.

In the case of a stock dividend, the declaration entry involves debiting Retained Earnings but also involves two credits: one to the Common Stock Dividends Distributable and another to Paid in Capital in Excess of Par Common Stock. This captures both the par value and any additional market value of the shares being distributed. When the stock dividend is issued, the Common Stock Dividends Distributable account is debited and Common Stock credited, thereby completing the transaction without affecting cash flow.

Retained Earnings are the accumulated profits of a company that are not distributed as dividends but are instead reinvested in the business or held for future needs. It is an important component of a company’s equity on the balance sheet.

When dividends are declared, whether cash or stock, they reduce the retained earnings because these earnings are being distributed to shareholders. For instance, in the Murphy Corporation example, both the cash dividend and the stock dividend declarations impact the retained earnings significantly.

The cash dividend reduces the Retained Earnings account directly by the total amount of cash slated to be paid out. A stock dividend also reduces Retained Earnings due to the transfer of capital to different equity accounts, even though it does not affect the company’s cash flow. Understanding how these dividends affect retained earnings helps in assessing a company’s reinvestment strategy and overall financial health.