What Are Dividends Payable?
Dividends payable are dividends that a company’s board of directors has declared to be paid to its shareholders but have not yet been disbursed. These are recorded as an appropriation in the profit and loss account, reflecting their declaration, and as a current liability on the balance sheet, denoting the company’s obligation to its shareholders.
Examples
Example 1: Declaration of Dividends Suppose XYZ Corporation declares a dividend of $1 per share on April 1st, payable on April 30th. They have 10,000 shares outstanding. At the declaration date, XYZ will record a dividends payable of $10,000 (10,000 shares x $1 per share).
Example 2: Payment of Dividends Following the previous example, on April 30th, XYZ Corporation pays the $10,000 dividend. The journal entry would remove the dividends payable and record a cash outflow of $10,000.
Frequently Asked Questions
Q1: Why are dividends payable recorded as a current liability? A1: Dividends payable are recorded as a current liability because they represent a financial obligation that the company must fulfill within the upcoming fiscal period or one year, whichever is shorter.
Q2: How do dividends payable affect a company’s financial statements? A2: On the announcement of dividends, the dividends payable account is credited, and retained earnings are debited, reflecting the reduction in retained earnings due to the dividend declaration. This also affects the liability section of the balance sheet.
Q3: Are dividends always paid in cash? A3: No, dividends can be paid in other forms such as stock dividends, where additional shares are distributed instead of cash, or property dividends, where assets other than cash are distributed.
Q4: What happens if dividends payable are not paid within the designated period? A4: If dividends are not paid within the designated period, they remain as outstanding current liabilities on the balance sheet until a resolution is reached.
Q5: How do companies determine the amount of dividends payable? A5: Companies typically determine dividend amounts based on their profitability, retained earnings, cash flow position, and dividend policy set by the board of directors.
Related Terms
- Dividends: Payments made periodically by a corporation to its shareholders out of its profits.
- Appropriation: Allocation of a company’s profits for specific purposes, including dividend payments.
- Profit and Loss Account: A financial statement showing a company’s revenues and expenses over a specific period, culminating in the net profit or loss.
- Current Liability: Obligations that a company is expected to pay within one year or within a normal operating cycle.
References for Online Study
- Investopedia - Dividends Definition: Investopedia - Dividends
- AccountingTools - Dividends Payable: AccountingTools - Dividends Payable
- Corporate Finance Institute - Dividends: Corporate Finance Institute - Dividends
Suggested Books for Further Studies
- “Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso: A comprehensive textbook covering the key accounting principles including dividends and other shareholder equity topics.
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield: This book provides in-depth knowledge on financial reporting and analysis, including the treatment of dividends payable.
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper: A beginner-friendly guide to understanding accounting terms and processes like dividends payable.
Accounting Basics: “Dividends Payable” Fundamentals Quiz
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