Are dividends an expense?
Dividends are profits from a company that is usually distributed to shareholders as a return on the investments made in the company. They are derived from the profit made by the company or the retained earnings of the company, after the deduction of the due amount in corporate income taxes owed to the IRS.
This profit is then shared and remitted to each shareholder, depending on the amount of investment made and the number of shares owned in the company. The deduction of dividends from the company is usually recorded as a reduction in the retained earnings accounts of a company and not as expenses, this is because the company’s profit is usually remitted to the retained earnings for various purposes, one of which is dividends payment.
Sometimes, however, in the case of stock dividends, the retained earnings are used to purchase common stock of the company and increase the shareholder’s stock without cash payout or cash flow. This gives an allowance to invest the earnings in the company for the next business quarter and probably increase the company’s profit for the next business quarter.
Dividends in itself are not an expense but is gotten after deducting the corporate income tax and other necessary expenses from the income realized by the organization. Dividends cannot however be seen as expenses in a business because they actually are not deducted to aid daily business operations or in any way related to product production or sales, but they are only fractions of profit realized from the business operations paid out to investors. Due to this, dividends cannot be reported as expenses on the Income statement of the company since they do not impact the company’s net income.
Dividends paid to investors can be in various forms.
- Dividends can be paid as cash directly to investors to reward them for the shares owned in the company. For this kind of dividends, the company will have to decide how much a shareholder gets in return for each share owned. Payment of these cash dividends is usually recorded as a reduction in the retained earnings accounts of a company and not as expenses.
For example; a company can decide to pay investors $5 for each share owned in the company as a dividend. How much each investor gets paid will then be dependent on how much shares he/ she owns in the company.
- Dividends can be paid in form of additional shares to the ones already owned by an investor leading to more shares owned without a direct cash payment. This is called a stock dividend. This type of dividend payment helps retain earnings in the company and instead the retained earnings are used to purchase the company’s common stock to increase a shareholder’s shares in the company.
- Dividends paid to investors for their investment in the company’s shares could be in form of assets owned by the company. This is called property dividends. Shareholders are neither rewarded with cash or shares but rewarded with assets of the company as deemed fit for a reward.
- For some companies, dividends are shared after liquidating the company with the intention of closing down the business. All the assets and cash realized after necessary liability settlement is then shared among the shareholders depending on the shares owned in the company. The business fully closes down after dividends are shared.
Dividends paid to shareholders come from the profit of the company or the retained earnings of the company, in accordance with the number of shares owned by the shareholder in that company. Cash dividends, even though they reduce the overall amount of cash in the company, cannot still be recorded as expenses on the company’s income statement. Rather, they are recorded as a reduction to the retained earnings of the company.
Since dividends are not monetary contributions to the daily running of business operations, it cannot qualify as an expense. However, dividends for shareholders in a company help a lot to keep the investors happy and by so doing, it brings more business growth.
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