What is a Dividend?
A dividend is a payment made to shareholders that is proportional to the number of shares owned. It is authorized by the board of directors. Dividends are usually issued by companies that will not reap significant growth by reinvesting profits, and so instead choose to return funds to shareholders in the form of a dividend.
Are Dividends a Company Expense?
Dividends are not considered an expense, because they are a distribution of a firm’s accumulated earnings. For this reason, dividends never appear on an issuing entity's income statement as an expense. Instead, dividends are treated as a distribution of the equity of a business back to its shareholders.
Treatment of a Cash Dividend
When dividends are paid in cash, they are subtracted from the equity section of the balance sheet and are also subtracted from the cash line item in the balance sheet, resulting in an overall decline in the size of the balance sheet. If dividends have been declared but not yet issued, then they are stated as a current liability on the balance sheet. Dividends that have been paid within the reporting period are also listed within the financing section of the statement of cash flows as a cash outflow.
Treatment of a Stock Dividend
If a stock dividend is issued instead of cash, this represents a reallocation of funds between the additional paid-in capital and retained earnings accounts. This is simply a reshuffling of amounts within the equity section of the balance sheet. Thus, stock dividends are also not considered an expense.
