Dividend is the total amount of money issued paid by the company to its shareholders from their profit.
At the end of every financial year, every company announces calculate their profit & loss on the basis of transactions occurs during the year.
If the company earn some profit during the year, then board of directors announces dividends for the company’s shareholders.
As the financial statements are a summarize form of all the transections of the company that’s why the declaration of dividend also affect the financial statements of the company.
A company may declare two or more dividends to their shareholders in one year.
Types of dividends:
You can divide divided into six following types.
- Cash dividend
- Stock dividend
- Property dividend
- Scrip dividend
- Liquidating dividend
International Accounting Standards specify accounting treatments for all types of dividends. And it’s required by the company to follow those rules and regulations.
What is Cash Dividend?
This is the most commonly used type of dividend. In this type the directors of the company accounted a payment date on the date of declaration of dividend.
Board of directors specify a certain amount in cash to the investors of the company. The date on which dividend is assigned to the shareholders is called date of record.
Effects of Cash Dividends:
As the cash dividend required a proper transaction in the books of accounts that if definitely affect the financial statements of the company.
Because on the date of declaration it becomes liability of the company to pay the dividend to the shareholder.
And on the date of payment dividend affects the cash flow as well as owner’s equity.
Note that the declaration and payment of dividend to the shareholders will not affect the statement of income and loss of the company.
So from this you can easily say that dividend on common stock of the company is not an expense for the company.
The other point is that the cash dividend on the preferred stock will be deducted from the net income of the company first and then you will arrive on the figure called net income available for common stock.
On the date of declaration:
In general, on the declaration date of cash dividend on its stock, the following scenario will occur:
Retained Earnings A/C Dr
Current Liabilities/Dividend Payable Cr.
This journal entry means that on the date of declaration the retained earning of the company will decrease with the amount declare by the board.
And your current liabilities in the balance sheet side will increase because now it becomes your liability to pay this amount to shareholders with in the next year.
So at the first it will affect the balance sheet of the company along with retained earnings.
- Retained Earning Decreases
- Current Liabilities Increases
On the Date of Payment:
On the date of payment when the company is going to pay cash to their shareholders, this will affect like
Current Liability/Dividend Payable Dr
Current Assets/Cash Cr
This transaction means that on the date of payment the cash dividend will affect again the balance sheet of the company by decreasing the current liability section with decrease in current assets.
- Current liability Decreases
- Current Assets Decreases
Effect on Cash Flow:
As the cash flow is only deal with the cash transactions of the company that why it is not affected on the date on declaration of dividend.
But the cash dividend will affect cash flow on the date of payment because there will be an out flow of cash from the cash account of the company.
This out flow will be included in the financing activities section of cash flow.