Are dividends considered an expense? — AccountingTools (2024)

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Are dividends considered an expense? — AccountingTools? ›

Treatment of Dividends in Financial Reporting

Cash or stock dividends distributed to shareholders are not recorded as an expense on a company's income statement. Cash dividends are cash outflows to a company's shareholders and are recorded as a reduction in the cash and retained earnings accounts.

Dividends are paid out of retained earnings, which is part of stockholders' equity on the balance sheet. Dividends are not considered an operating expense because they are not required to run the business in normal course of business. Just remember that there is no income statement impact for dividends!

Cash Dividends on the Balance Sheet

After the dividends are paid, the dividend payable is reversed and is no longer present on the liability side of the balance sheet. When the dividends are paid, the effect on the balance sheet is a decrease in the company's retained earnings and its cash balance.

Key Takeaways

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

Both the Dividends account and the Retained Earnings account are part of stockholders' equity. They are somewhat similar to the sole proprietor's Drawing account and Capital account which are part of owner's equity.

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.

Once declared and paid, a cash dividend decreases total stockholders' equity and decreases total assets. 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.

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.

The amount of the dividend per share must be determined before it can be recorded in the P&L. This amount depends on whether the dividend is classified as a cash or stock dividend, whether it is a regular or special dividend and whether it will be split.

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):

Can a Corporation Deduct Dividends Paid to Shareholders? C corporations pay tax on their income before paying dividends. For them, dividends are not a deductible expense.

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.

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.”

A common stock dividend distributable appears in the shareholders' equity section of a balance sheet, whereas cash dividends distributable appear in the liabilities section.

Dividends that were declared but not yet paid are reported on the balance sheet under the heading current liabilities. Dividends on common stock are not reported on the income statement since they are not expenses.