What Is a Dividend?
How companies share profit with shareholders, and how it is recorded.
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| Paid by | Companies, to shareholders |
|---|---|
| Effect | Reduces retained earnings and cash |
| Topic | Financial accounting · Equity |
Dividend in plain English
When a company makes a profit, it can keep it in the business or pay part of it to the owners. The part paid out is the dividend. It is a way of sharing profit, not a cost of earning it, so it never appears in the income statement.
Worked example
A company declares a dividend of 5,000.
| When | Debit | Credit |
|---|---|---|
| Declared | Retained earnings 5,000 | Dividends payable 5,000 |
| Paid | Dividends payable 5,000 | Cash 5,000 |
- Treating a dividend as an expense. It is a distribution of profit that reduces equity.
- Mixing it up with owner’s drawings, which is the equivalent for sole traders and partners.
Frequently asked questions
Is a dividend an expense?
No. It is not a cost of earning revenue. It is a distribution of profit and does not affect profit for the year.
Who decides to pay a dividend?
The directors propose it and, usually, the shareholders approve it. Once declared, it becomes a liability.
What is the difference between dividends and drawings?
Dividends are paid by companies to shareholders. Drawings are withdrawals by the owner of an unincorporated business.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.