Whether dividends paid on stock are considered assets depends on which role you play in the investment: the issuing company or the investor. As an investor in the stock market, any income you receive from dividends is considered an asset. However, for the company that issued the stock, those same dividends represent a liability.
Key Takeaways
- For shareholders, dividends are an asset because they increase the shareholders' net worth by the amount of the dividend.
- For companies, dividends are a liability because they reduce the company's assets by the total amount of dividend payments.
- The company deducts the value of the dividend payments from its retained earnings and transfers the amount to a temporary sub-account called dividends payable.
- Accumulated dividends give owners of cumulative preferred stock the right to receive dividends before other shareholders.
What Are Dividends?
At the end of each fiscal year, a company that turned a profit can choose to redistribute some of those funds to its shareholders in the form of dividends. They can pay dividends on a regular schedule, often on a quarterly basis. Dividends basically offer a tangible way for companies to show gratitude to their shareholders for their continued support and investment.
Paying consistent or increasing dividends each year is considered a sign of financial health. Businesses with generous dividend histories tend to be very popular among investors.
While common shareholders have the right to any common dividend payment, they are not guaranteed dividend payments; a company that has paid dividends in the past can suspend payments for a variety of reasons.
Dividends Are Considered Assets for Shareholders
When a company pays cash dividends on its outstanding shares, it first declares the dividend to be paid as a dollar amount per owned share. For example, a company with 2 million shares outstanding that declares a 50-cent cash dividend pays out a total of $1 million to all shareholders.
Cash dividends are considered assets because they increase the net worth of shareholders by the amount of the dividend.
For Companies, Dividends Are Liabilities
Conversely, the assets of the issuing company are reduced by the payment of a dividend. In fact, the declaration of a dividend creates a temporary liability for the company.
When a dividend is declared, the total value is deducted from the company's retained earnings and transferred to a temporary liability sub-account called dividends payable. This means the company owes its shareholders money but has not yet paid. When the dividend is eventually distributed, this liability is wiped clean and the company's cash sub-account is reduced by the same amount.
The end result is the company's balance sheet reflects a reduction of the assets and stockholders' equity accounts equal to the amount of the dividend, while the liabilities account reflects no net change.
Accrued Dividends vs. Accumulated Dividends
Dividends on common stock that have been declared by a company but not yet paid to shareholders are called accrued dividends. These dividends are now the property of the record-date shareholder, which means those shareholders become creditors of the company.
To be eligible for the dividend, shareholders must buy the stock at least two business days before the record date, which is the cutoff date used to determine which shareholders are entitled to receive dividends. The company books these dividends as a current liability from the declaration date until the day they are paid to shareholders.
But what happens if a company fails to pay dividends to its shareholders? There are various reasons a company might suspend its dividend payments. A company may stop paying shareholder dividends in response to an economic downturn, an unexpected increase in operating expenses, or a need to use the money to fund important projects. In this scenario, owners of the company's common stock will not receive dividend payments.
However, the situation is different for shareholders of cumulative preferred stock. These shareholders own stock that stipulates that missed dividend payments must be paid out to them first before shareholders of other classes of stock can receive their dividend payments. This results in accumulated dividends, which are unpaid dividends on shares of cumulative preferred stock. Accumulated dividends will continue to be listed on the company's balance sheet as a liability until they are paid. If and when the company begins paying dividends again, shareholders of cumulative preferred stock will have priority over all other shareholders.
FAQs
For shareholders, dividends are an asset because they increase the shareholders' net worth by the amount of the dividend. For companies, dividends are a liability because they reduce the company's assets by the total amount of dividend payments.
Are dividends subtracted from assets? ›
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.
How to treat dividends in financial statements? ›
If a company pays a dividend by distributing income from current operations, the transaction is recorded as an operating activity on the cash flow statement. On the other hand, if a company pays a dividend from retained earnings, then it is recorded on the balance sheet as both an asset and liability entry.
Can dividends be paid in assets? ›
The total dividend pot is the company's net profits, i.e. after business expenses and tax payable. Cash dividends are most common, but dividends can be paid in the form of assets or further share capital, known as stock dividends.
Are dividends an asset on a balance sheet? ›
Stock dividends do not result in asset changes to the balance sheet but rather affect only the equity side by reallocating part of the retained earnings to the common stock account.
What are dividends considered? ›
Dividends are distributions of property a corporation may pay you if you own stock in that corporation. Corporations pay most dividends in cash. However, they may also pay them as stock of another corporation or as any other property.
Do dividends affect assets and liabilities? ›
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.
How are dividends recorded in accounting? ›
To record a dividend, a reporting entity should debit retained earnings (or any other appropriate capital account from which the dividend will be paid) and credit dividends payable on the declaration date.
Does dividends count as equity? ›
Dividends are included in the calculation of shareholders' equity. They are subtracted from cumulative retained earnings and current-year net income to arrive at the retained earnings for the current year.
How to put dividends on a balance sheet? ›
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.”
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.
When should dividends be recognised in accounts? ›
No, the dividend obligation is only created on the date of declaration. Therefore, any dividend declared after the year end for previous year accounts would only be deemed to be paid in the year of declaration.
Do assets increase when dividends are paid? ›
The correct answer is d.
When dividends paid, the company's cash will decrease and dividends will increase, which will decrease retained earnings. Assets will decrease.
Do dividends reduce retained earnings? ›
In the retained earnings formula, dividends reduce the amount left for retained earnings. The more dividends a business pays out, the less retained earnings it has. Businesses distribute dividends in two ways: via cash and via stock.
Where do dividends go on a balance sheet? ›
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.”
What category is dividends on a balance sheet? ›
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.
Are dividends considered equity? ›
Dividends are included in the calculation of shareholders' equity. They are subtracted from cumulative retained earnings and current-year net income to arrive at the retained earnings for the current year. “Dividends are a withdrawal of money from the business,” Sood says.
Are dividends included in net asset value? ›
Income can include interest earned or dividends paid. Therefore, since companies regularly pay out income to shareholders, the NAV may drop in correlation to these payments. This means that these values are not represented in the NAV values when you compare two dates.
