Are dividends considered an expense? — AccountingTools (2024)

FAQs

Are dividends considered an expense in accounting? ›

Dividends are not considered an expense. Instead, they represent a distribution of profits to shareholders. When a company earns profits, it can choose to either reinvest those profits back into the business (retained earnings) or distribute a portion of them to shareholders in the form of dividends.

Dividends are not considered an expense, because they are a distribution of a firm's accumulated earnings. For this reason, dividends never appear on an issuing entity's income statement as an expense. Instead, dividends are treated as a distribution of the equity of a business back to its shareholders.

Dividends are not Expenses

When a company pays a dividend it is not considered an expense since it is a payment made to the company's shareholders.

Key Takeaways

All dividends paid to shareholders must be included on their gross income, but qualified dividends will get more favorable tax treatment.

Dividends can be accounted for using either accrual or cash flow methods depending on the company's financial activity during a specific period. The accrual method considers regular payments made by the company (regardless of whether shareholders have received them or not).

A dividend is neither an income nor an expense for a company. Dividends do not impact a company's income or expenses in its financial statements. Dividends come out of shareholders' equity. Cash dividends reduce shareholders' equity.

Dividends are paid out of the company's retained earnings, so the journal entry would be a debit to retained earnings and a credit to dividend payable. It is important to realize that the actual cash outflow doesn't occur until the payment date. This shows the company plans to pay dividends.

Dividends Payable is classified as a current liability on the balance sheet, since the expense represents declared payments to shareholders that are generally fulfilled within one year.

A declared dividend is classified as an expense. The accounts used to record the declaration of a dividend are Dividends Payable and Dividends Expense. When declared dividend is paid, Dividends is debited.

What Is an Expense? An expense is the cost of operations that a company incurs to generate revenue. It is simply defined as the cost one is required to spend on obtaining something. As the popular saying goes, “it costs money to make money.”

What is the journal entry for dividends? ›

Accounting for Cash Dividends

The journal entry to record the declaration of the cash dividends involves a decrease (debit) to Retained Earnings (a shareholders' equity account) and an increase (credit) to Dividends Payable (a liability account):

Here's how: Balance Sheet: Dividends paid reduce the “Retained Earnings” account under the “Equity” section. When dividends are declared but not yet paid, they may appear as a “Dividends Payable” under “Current Liabilities.”

Dividends are not reported on the income statement. They would be found in a statement of retained earnings or statement of stockholders' equity once declared and in a statement of cash flows when paid.

A dividend is a reward paid to the shareholders for their investment in a company's equity, and it usually originates from the company's net profits. For investors, dividends represent an asset, but for the company, they are shown as a liability.

A stock dividend is a payment to shareholders that consists of additional shares rather than cash. The distributions are paid in fractions per existing share. For example, if a company issues a stock dividend of 5%, it will pay 0.05 shares for every share owned by a shareholder.

Cash Dividends is a contra capital account that is created on a temporary basis for recording the declaration of dividends. This Stockholder's Equity account is closed at the end of the accounting period by transferring its balance to Retained Earnings.

A cash dividend primarily impacts the cash and shareholder equity accounts. There is no separate balance sheet account for dividends after they are paid. However, after the dividend declaration but before actual payment, the company records a liability to shareholders in the dividends payable account.