Definition
A Declaration of Dividend is an official statement made by a company’s board of directors announcing that a dividend payment will be made to shareholders. This declaration specifies the amount of the dividend and implies the company’s obligation to distribute the payment. Once declared, the company must recognize the liability in its financial statements, specifically under current liabilities in the balance sheet. The dividend is paid to shareholders net of income tax.
Examples
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ABC Corporation:
- On January 15th, ABC Corporation’s board of directors declared a dividend of $1 per share to be paid to shareholders of record as of February 1st. The date of payment is set for February 15th. Upon declaration, ABC Corporation would recognize a liability of $1 per share times the number of shares outstanding, and this amount would be recorded as a current liability on the balance sheet.
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XYZ Inc.:
- XYZ Inc.’s board announced on March 20th a $0.50 per share dividend to be distributed to shareholders on April 10th. The liability for dividends payable of $0.50 per share would be recorded on the balance sheet as of the declaration date, March 20th.
Frequently Asked Questions (FAQs)
1. What is the significance of the declaration date?
The declaration date is the day on which the board of directors announces the dividend and commits the company to pay it. From this date, the dividend becomes a liability on the company’s balance sheet.
2. When does a dividend become a current liability?
A dividend becomes a current liability as soon as it is declared by the company’s board of directors.
3. How is dividend payment reflected on the balance sheet?
Once declared, the dividend amount is recorded under current liabilities on the balance sheet until it is paid out to shareholders.
4. What is the net dividend payment?
The net dividend payment refers to the amount shareholders receive after the deduction of applicable taxes. The company typically deducts this tax before distributing the dividend.
5. Is the declaration of a dividend mandatory for all companies?
No, dividend declaration is not mandatory and depends on the company’s financial health, policies, and decisions made by its board of directors.
6. What happens if a company fails to pay a declared dividend?
If a company fails to pay a declared dividend, it still carries the obligation as a liability, which could affect shareholder trust and potentially lead to legal proceedings.
Related Terms
Dividend
A sum of money paid regularly by a company to its shareholders out of its profits or reserves.
Liability
An obligation that the company is bound to pay in the future, recorded on the balance sheet.
Current Liabilities
Obligations that are due to be settled within one fiscal year, including declared dividends.
Balance Sheet
A financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
Online References
- Investopedia - Dividend
- Investopedia - Balance Sheet
- Corporate Finance Institute - Current Liabilities
Suggested Books for Further Studies
- “Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
Accounting Basics: “Declaration of Dividend” Fundamentals Quiz
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