Accounting for dividends

[James Kerr]

On Monday 12 April 2010 Maf. King wrote:

> On Monday 12 April 2010 05:46:15 Paul A. wrote:
> > The thing that makes dividends so tricky is that they are not an expense.
> > Treating them as an expense screws up the P&L statement.  Yet you don't
> > really want them accumulating in some flavor of an equity account,
> > because money paid out in dividends or drawings is not in the business
> > treasury any more.
> 
> Hi Paul,
> 
> I record dividends as an expense.  It seems to me that is the closest
>  category for what they do - certainly not asset/liability or income, can't
>  see how equity would be suitable either - what is your reasoning that
>  makes them not an expense?
> 

Including dividends in the P&L would understate the profit (or overstate the 
loss) from the year's operations.

Dividends are a (partial) distribution of accumulated retained earnings. That is 
why a company can pay a dividend in a year in which it makes no profit. Many 
companies want to have a stable dividend paying record over the long term. They 
believe that it makes it easier to raise additional capital as well as placating 
shareholders. 


Jim