What you should know about dividend accounting
Dividends are the portion of a company’s earnings which it returns to investors, usually as a cash payment. Mature companies aren’t likely to need cash reserves to fund additional growth and are therefore the most likely to issue dividends to its investors.
Companies are not obligated to issue dividends. The issuing of these dividends is dependent on a number of factors. Essentially, dividends are paid out when a business makes a profit. The board of directors in the company decide when to pay dividends. Payment of dividends may be required under terms of a preferred stock agreement that specifies a certain dividend payment at regular intervals.
How dividend accounting works:
There are four key dates to keep in mind when dividends are declared and paid:
- Dividend date- when the dividends are declared by the board of directors
- Ex-dividend date- two days before the record date
- Record date- shareholders not registered as of this date will not receive the dividend
- Payment date- date on which dividends are deposited directly into your investment account. This is the date on which cash is paid out to shareholders to settle liability and the dividends payable account balance returns to zero.
When payment is made the dividend is said to have been declared. As soon as the dividend has been declared, the liability needs to be recorded in the books as a dividend payable. The dividend is charged against the retained earnings of the business, so it’s not an expense.
It’s important to note that the liability of the business to shareholders is established as soon as the dividend has been declared.
Dividends may also be paid in the form of other assets of additional stock. Paying dividends also attracts investors who seek a stable form of income over a long period of time.
Understanding dividend accounting is essential for ensuring that a business’s books are in order.