Contents

  1. Dividend payable
  2. Understanding of Dividend payable
  3. Effects of Dividend Payable
  4. Dividend payable vs Dividend Declared
  5. Advantages
  6. Disadvantages

Dividend payable

Dividends payable may be a part of accumulated profits approved by the board of administrators to be paid to the company’s shareholders as a comeback on their investment within the company’s shares. Once the dividend is approved by the company’s administrators in their annual general meeting, it becomes owed to the shareholders. The dividend owed may be a liability for the corporate until the time it’s paid.

Understanding of Dividend payable

The dividend is paid by the corporate from its once-tax profits. Once tax profits are the profits are calculated by deducting all the expenses and taxes from the revenue. It’s additionally known as preserved Earnings. The dividend owed becomes owed only the board of administrators declares and approves it within the annual general meeting. It a liability of the corporate and should be paid at intervals within the time frame determined. Once the board announces the dividend, AN account known as ‘Dividend owed A/c’ is attributable to the number of dividends to be paid, and preserved Earnings A/c is debited with identical quantity.

Recording and Example of Dividend Payable

The dividend owed may be a short-term liability of the corporate (Short-term liabilities are those liabilities that have to be compelled to be paid at intervals of one year). It’s shown beneath the pinnacle ‘Current Liabilities’ within the record of an organization.

There are essentially 2 Journal entries in hot water recording dividends owed within the books of accounts. The primary entry is finished at the time of making liability and another whereas paying off that liability.

Journal Entry for Recording Dividend Payable

The dividend is paid from the preserved earnings of the corporate, once a dividend is said by the board, the preserved earnings account is debited and therefore the dividend owed account is attributable to the number of dividends to be paid.

  • Retained Earnings A/c – Debited
  • Dividend owed A/c – attributable

The higher entry reduces the preserved earnings balance and creates a dividend liability for the corporate.

Journal Entry for Payment of Dividend

When a dividend is paid by the corporate, the dividend owed account is debited and therefore the brokerage account is attributable to the number of dividends paid.

  • Dividend owed A/c – Debited
  • Cash A/c – attributable

The higher entry eliminates the dividend owed liability and reduces the money balance with an identical quantity.

Effects of Dividend Payable

There are 3 accounts affected whereas journalizing dividends owed within the books of accounts. These are dividends owed, preserved earnings, and brokerage accounts.

  • Dividend Payable: The dividend owed may be a short-term liability for the corporate. It’s shown beneath the pinnacle current liabilities within the record. So, it will increase the short-term liabilities of the corporate.
  • Retained Earnings: The dividend is paid from the preserved profits of the business. So, distributing dividends reduces the preserved profits of the corporate.
  • Cash: Dividend is paid in the style of money or bank transfer therefore it affects the money reserves of the corporate. It impacts the liquidity of the corporate. Since the impact is short and doesn’t have an effect on the monetary stability of the company; it’s not abundant of a priority for the board members.

Dividend payable vs Dividend Declared

A dividend declared becomes a dividend owed once it’s approved by the board of administrators within the annual general meeting of the corporate.

Dividend owed is that the liability of the corporate that arises only the dividend is said and approved by the board.

Advantages

Paying dividends has the subsequent blessings for the company:

  • Shareholder Loyalty: Investors are an additional attraction towards the businesses that pay regular dividends to their shareowner.
  • Impact on Stock Price: Paying dividends to the shareholders undoubtedly contains a positive impact on the company’s stock value.
  • Tax Advantages: The dividend financial gain of sure shares attracts lesser/No taxes than alternative regular financial gain sources.

Disadvantages

Paying dividends has subsequent disadvantages for the company:

  • Impact on Liquidity: Paying dividends contains a negative impact on the money reserves of the corporate. This money would otherwise are utilized for the expansion and development of the corporate.
  • Impact on Stock Price: once an organization is frequently paying a dividend to its shareholders, its stock value remains stable. But once, once it fails to pay dividends thanks to any reason, the investors can begin marketing their shares that successively can affect the share value.
Uncategorized