Dividends

Introduction to Dividends

We have previously described that dividends presents drawings through the shareholders of the company. Dividends are paid out of the revenue reserves and should be subtracted from these reserves (generally retained earnings) while preparing the statement of financial position. Shareholders are frequently paid an annual dividend, perhaps in two parts. An 'interim' dividend might be paid part way by the year and a 'final' dividend soon after the year end.

Dividends that are declared through the directors throughout the year but still unpaid at the yearend might appear like a liability in the statement of financial position. To be recognised like a liability, though, they must be suitably authorised before the year-end date. This generally means that the shareholders have to be approve the dividend.

Large companies are apt to have a clear and consistent policy in the direction of the payment of dividends. In the policy any change provokes substantial interest and is generally interpreted through shareholders as a signal of the views of directors concerning the future. For instance, a raise in dividends might be taken like a signal from the directors that future prospects are bright: a higher dividend is seen like tangible proof of their confidence.

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