Dividend is one of the most common accounting words that business owners and shareholders use. But do you know what “Dividend” means?
The Dividend refers to the earnings or portion of the profit that a company pays to its investors or shareholders. A dividend is distributed among the shareholders when the company generates a profit or accumulates the retained earnings.
Accounting for dividends is complicated and requires time to understand for common people. We’ve compiled some interesting information to help you cross your bounds and understand the accounting for dividends.
Advantages and Disadvantages of Dividends
There are both advantages of dividends and disadvantages as well. Read about the advantages and disadvantages below:
Dividend received has four main advantages, and they are stated below:
- In numerous parts of the world, dividends are tax-exempt. Because tax is deducted at the source that is on the distribution of benefits by the organization, in this way, whenever the shareholder gets his dividends, he won’t be asked to pay taxes for those dividend incomes.
- Investors who have put resources into the organization become gladder and surer with regards to the organization since everyone likes to have additional growth and profit. If there’s a rise in the shares, profit is the leading revenue resource for investors.
- The information signaling concept in the stock market is highly beneficial. As per this concept, if an organization has a solid financial position, investors would become more acquainted with it when they signal it by issuing the Dividend on time. Because not every company investor has financial information about the different budget reports, such investors will be cheerful and happy once they receive their Dividends.
- Another main advantage of dividends could be that individuals who prefer to get a steady kind of revenue and they invest all their investment into shares, there are chances that they will invest in organizations. They will consider investing in those organizations that usually pay their dividends on time instead of those that don’t pay or pay irregular dividends.
Dividends are not always as valuable as you may think. Like advantages, there are three main disadvantages of accounting for dividends, and they are as under:
- The first and foremost disadvantage is that an organization manages to pay its dividends in 1 year and can’t pay in the upcoming years. In such situations, investors start to worry about its future as its financial position is everything to them, and they start selling stock.
- This also results in increasing and spreading negativity about the company. So, an organization should pay its dividends of time rather than erratic dividends.
- Another disadvantage of dividends is that when an organization pays dividends, it runs out of money that could be used for putting into the business and would have brought about more development for the betterment of the organization.
- The last disadvantage is that company has to pay tax on the distribution of profit among its shareholder. This can be a bit costly as taxes are sometimes very hefty.
We’ve presented two examples to help you better understand the accounting for dividends received. Both the two examples listed below represent how a company makes journal entries for its Dividend received.
Consider an example, On June 30, QPR Ltd. company gets a cash dividend from its share investments.
The Dividend received is $15 per shareholding, and the QPR Ltd. company has a total of 1,000 shares representing 15% of ownership.
In this case, the QPR Ltd. company will make the journal entry for the $15,000 ($15 x 1,000) dividend received on June 30 by debiting $15,000 to the cash account and crediting the same $15,000 to the dividend income account.
This journal entry is made to increase the total assets on the Statement of Financial Position/Balance Sheet and total revenues on the Profit and Loss Statement of the QPR Ltd. company by $15,000.
For instance, the organization QPR Ltd. has a share investment in ABC with 30% shares.
Consider on July 31, the organization XYZ reports an overall gain of $400,000 for the year, and simultaneously, it additionally proclaims and issues a cash dividend of $50,000 to its shareholders.
As the organization QPR Ltd. acquired 30% of shares investment, under the equity technique, it needs to record 30% of ABC’s total compensation, which is $120,000 ($400,000 x 30%) as an increase in the investments.
Furthermore, simultaneously, it needs to take the record of the Dividend received of $15,000 ($50,000 x 30%) as a lessening share investment.
Subsequently, the organization QPR Ltd. will make the journal entry for the share percentage of ABC’s total compensation and the Dividend received on July 31, as given under:
|Share Investments||$ 120,000|
|Revenue Generated from Share Investments||$ 120,000|
As per the journal entry made above, the $15,000 of the Dividend received is recorded as the decrease of share investments.
Whenever a company earns a profit, there are only two uses in which it can be reused. A company can reinvest this profit for better and higher returns.
Otherwise, the company needs to share a specific portion of this profit, i.e., it’s paid as a dividend with the current shareholders.
Receiving dividends is the legal right of every shareholder. There are both advantages and disadvantages to obtaining the Dividend.
We’ve shared everything related to dividends received in this blog along with its explanation, examples, and journal entries for you.