Business Accounts - Dividends Flashcards
(15 cards)
What is a dividend in company law and accounting ?
A shareholder’s return on investment, paid out of a company’s profit after tax. It is an appropriation of profit, not an expense
Where do dividends appear in a company’s financial statements?
In the Statement of Changes in Equity (SoCiE)—not in the Profit and Loss Account, because they are capital transactions between the company and its shareholders.
What are retained earnings?
Undistributed profits from current or previous years after tax, shown in the bottom half of the balance sheet under reserves
How are retained earnings calculated?
Brought forward retained earnings.
Profit for the year - dividends paid = retained earnings carried forward
Why are dividends excluded from the profit and loss account?
Because they are distributions to owners, not expenses of the business
What is a final dividend?
Recommended by the board and declared by the shareholders after the year end by ordinary resolution
When does a final dividend become a debt?
Once it is declared by an ordinary resolution, it becomes enforceable as a debt
How is the declared final dividend shown in the financial statements?
- In the SoCiE as a deduction from retained earnings
- If unpaid, also as a current liability in the balance sheet
What is a final dividend is only proposed, not declared, before year-end?
It does not appear in the accounts for that year because it is not yet approved and is not a liability.
What is an interim dividend?
Declared and paid by the board during the current accounting period, without shareholder approval
Do interim dividends appear as liabilities in the balance sheet?
Only if paid after year-end. If already paid, they reduce assets (cash) and are reflected in the SoCiE but not shown as liabilities
Where do interim dividends appear in the financial statements?
- Not in the P&L
- Deducted in the SoCiE
- Reflected in cash at bank if already paid
Can a board revoke a resolution to pay an interim dividend before its paid?
Yes - interim dividends can be rescinded before payment, and are not enforceable debts until paid
What happens in the accounts when a declared dividend is paid before year-end?
Not shown as a liability
Shown in the SoCiE as a deduction from profit
What happens if a declared dividend is unpaid at year-end?
Shown as a current liability
Still deducted from retained earnings in the SoCiE
