Is Dividend A Liability Or An Asset? What Is Its Treatment In The Balance Sheet
What Is Dividend
A dividend is the amount that is paid or distributed by the company to its shareholders by the company’s profit. In simple words, a dividend is the portion of a company’s earnings for the year that is being shared with the shareholders of the company.
Dividends can be paid monthly, quarterly, or annually in the form of cash, or issuing bonus shares.
Dividends are approved or decided by the voting of the shareholders. Those shareholders decide whether a dividend should be given or not, and if yes then how the dividend should be paid whether in the form of cash or shares. The most common way of sharing dividends is the cash dividend.
A dividend is necessary to main the record of the distributions because it attracts more investors to invest their funds in the company. A company can preserve this portion for retained earnings for reinvesting in other sectors and projects when the company did not make a good or suitable profit for sharing dividends.
Is Dividend A Liability Or An Asset
When a company declares a dividend, it becomes a temporary liability for a company that is recorded in the balance sheet as a current liability (Dividend Payable).
The following is the double entry of a declared dividend of $20,0000:
| Account | Debit | Credit |
|---|---|---|
| Declared Dividend | $20,0000 | |
| Dividend Payable | $20,0000 |
When the dividend is paid, the double entry will be:
| Account | Debit | Credit |
|---|---|---|
| Dividend Payable | $20,0000 | |
| Cash | | $20,0000 |
The dividend is a liability for a company because it reduces the size of the assets from the company’s balance sheet while the dividend is an asset for the investors because a company gives them a return on their investments.
The followings are the important dates related to the dividends:
- Declaration Date: It is the date when a dividend is announced, it must be approved by the shareholders of the company
- Ex-Dividend Date: When the eligibility of taking dividend benefits expires
- Record Date: When a company decided the eligible shareholders that can take dividend benefit
- Payment Date: When a company pays dividends either in the form of cash or shares.
What Are Accrued Dividends And Accumulated Dividends
Accrued dividends are those dividends that a company has declared but did not pay during the fiscal year or payment date. This dividend is related to the record date shareholders that are selected and entitled to receive the dividend and they become the creditors of the company because the company has to pay them.
It is essential for a shareholder to buy the stock before the record date to be entitled to the dividend. The company records this as a current liability from the declaration date to the payment date.
Accumulated dividends are paid on the cumulative preferred stock that is outstanding or not paid yet. The shareholders of the cumulative preferred stock get the dividend first than any other class of shareholder in the company.
FAQs
Why a dividend is a liability for a company?
A dividend reduces the assets from the company’s balance sheet, and they are payable within a year or payment date that is normally in a single business cycle.
When a dividend is an asset?
A dividend is an asset for investors because it increases their net worth. A dividend can be an asset for a company if the company receives dividends from other companies in respect of its investments.
Is dividend a current liability?
A declared dividend is the current liability that a company has to pay within the payment date.
Is divided an asset or expense?
A dividend is neither an asset nor an expense because it is the portion of the equity in the balance that is shared with the shareholders of the company in the form of cash or stocks.
Why a dividend is not recorded in the income statement as an expense?
A dividend is a portion of the company’s earnings while the expense is the cost for the business, so it is recorded in the income statement and is used for sharing the profit portion to the shareholders of the company. The company’s earnings are added to the equities section while the dividend payment is deducted from the equity section in the balance sheet.
In which statements dividend is shown?
A dividend is shown in the cash flow statement in the section on financing, and in the balance sheet, it is shown in the Equity section.