What is Dividend Declared?
Dividend declared is that portion of profits earned by the company that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of company’s securities and such declaration of dividend creates a liability in the books of the concerned company.
In simple words, Dividends declared is the event where the company makes the declaration regarding payment of part of its earnings as a dividend to its shareholders. Such declaration leads to the creation of a liability account in the balance sheet of the company, for the associated payments, until the payment of the dividend is made. The value of such a liability account depends on the amount declared by the board of directors authorized by shareholders.
Difference Between Dividend Declared and Dividend Paid
- When the board of directors issues a declaration regarding dividend distribution, it is called dividend declared. The accounting effect of the dividend is retained earnings balance of the company is reduced, and a temporary liability account of the same amount is created called “dividends payable.”
- Dividend paid is the event when the dividends hit the investor’s account. When the dividends are paid, the “dividends payable” liability account is removed from the company’s balance sheet, and the cash account of the company is debited for a similar amount.
Journal Entries
On December 20, 2018, a company, XYZ Limited’s board of directors, announced that a cash dividend amounting to $ 4.5 per share would be paid to the shareholders of the company. The actual payment of cash dividends to the investors will be made on April 04, 2019. The total number of shares of the company is 2,50,000 shares.
Thus Dividend Declared journal entries to be made for it on December 20, 2018, is:
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- Retained Earnings to be Debited by Dividend * Number of shares = $ 4.5 * 2500 = $ 11,25,000/-
- Dividend Payable accounts on the current liability side to be credited by $ 4.5 * 2500 = $ 11,25,000/-
Now as was declared earlier, dividends will hit investors account on April 04, 2019, following journal entries will be passed in the company’s account:
- Dividend Payable accounts on the current liability side to be debited by $ 4.5 * 2500 = $ 11,25,000/-
- Cash account on current asset side to be credited by $ 4.5 * 2500 = $ 11,25,000/-
Benefits of Dividend Declared But Not Paid
It helps to develop a positive sentiment in the market for the company. For example, in case a company wants to create a positive sentiment in the market, thereby increasing the price of its shares. But it does not want to part with the cash in the company in the short term to create hedging for some contingency. The company may declare a dividend to be paid once the company’s short term contingency fund requirement is over. This way, the money will not flow out of the company’s books, and the positive sentiment will also be created in the market.
Points to Remember
- Tax payment on Dividends – In the case of a company, dividend distribution tax is paid by the company when the dividend is paid to the shareholders and not when it is declared. The announced dividend, along with the dividend distribution tax, is deducted from retained earnings at the time of declaration. And a similar amount is credited to the dividend payable liability account. But actual tax payment is made when the dividends hit the shareholder’s account.
- Upper Limit for the Dividend to be Declared: The company must not declare dividends more than the profits available from current and previous financial years of the company’s performance as it will create liquidity issues for the company.
- Can it be Reversed? Suppose a company declares a dividend on October 10, 2018, for dividends with future payment dates as March 25, 2019. However, there was a new policy rolled out by the government in the company’s sector of operation, which leads to a reduction in liquidity in the company for the medium term. Thus, the company requires cash for regular business operations. Hence, if a company wants such dividends to be reversed, the same can be done. The company will need to call for another meeting of the board of directors, and basis their vote, the dividends can be reversed.
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