Are Dividends Considered an Expense
Dividends are not considered an expense. Instead, they represent a distribution of profits to shareholders. When a company earns profits, it can choose to either reinvest those profits back into the business (retained earnings) or distribute a portion of them to shareholders in the form of dividends.
Dividends are not recorded on the income statement as an expense. Instead, they are recorded on the statement of retained earnings, which shows the changes in a company’s retained earnings during a specific period. The payment of dividends reduces the retained earnings balance, but it does not impact the company’s net income or expenses on the income statement.
Example of Are Dividends Considered an Expense?
let’s consider a fictional company called “ABC Corporation” to illustrate the concept of dividends and how they are not treated as an expense.
During the fiscal year, ABC Corporation earned a net income of $500,000. The company’s board of directors decides to distribute a portion of this income to its shareholders in the form of dividends. The company has 100,000 outstanding shares and declares a dividend of $2 per share.
Here’s how it would be recorded:
- Income statement: The net income of $500,000 will be reported on the income statement. No dividend expense will be recorded on the income statement because dividends are not considered an expense.
- Statement of retained earnings: Before declaring dividends, let’s say ABC Corporation had retained earnings of $1,000,000. The total dividend payout would be 100,000 shares * $2 per share = $200,000.
The statement of retained earnings would show the following:
- Beginning retained earnings: $1,000,000
- Net income: +$500,000
- Dividends: -$200,000
- Ending retained earnings: $1,300,000
- Balance sheet: The ending retained earnings of $1,300,000 would be reported under the equity section of the balance sheet.
As you can see, the dividend payment is not recorded as an expense on the income statement. Instead, it is a distribution of profits to shareholders that is reflected in the statement of retained earnings and the balance sheet.