Unpaid Dividend (Dividend Payable) - Explained
What is an Unpaid Dividend?
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Table of ContentsWhat is an Unpaid Dividend?How Does a Dividend Payable Work?Example of Dividend Payable TransactionEffect of Dividends Payable AccountNot to be Confused with 'Unclaimed Dividends'Accounting Implications of Unpaid Dividends
What is an Unpaid Dividend?
An unpaid dividend, also known as a Dividend Payable, refers to the dividend that a company has announced but has not been paid to stockholders. Dividends are profits that a company distributes to its shareholders. Corporations distribute money to its shareholders when profits are made. An unpaid dividend is a divided which the company has declared but had not been distributed to stockholders. From the moment a company announces dividends to the moment shareholders receive their dividends, an unpaid dividend exists.
How Does a Dividend Payable Work?
The date a company announces dividend is the record date, this is when shareholders of the company are eligible to receive distribution of dividends. If after declaring dividend, a company does not distribute dividends to shareholders, there will be a record of unpaid dividends.
An unpaid dividend is a liability. To record the unpaid dividend, credit the Unpaid Dividend Account and debit Retained Earnings.
Example of Dividend Payable Transaction
For example, company X announces $3 dividend to its shareholders holding 100,000 outstanding shares of common stock. Lets say, the declaration is made on April 1, 20018 and the date of paying the dividend is announced to be July 1, 2018, so in April the company records $300,000 as a credit to the dividends payable account and a debit to the retained earnings account. It remains there until the dividend is paid.
Effect of Dividends Payable Account
While calculating short-term liquidity (like current ratio or quick ratio) the dividends payable needs to be taken into consideration. While most of the liabilities of a company involve a third party, this is a liability payable to its own shareholders. Dividends payable is a valid liability as the company is obligated to pay the dividend once announced, and that involves an outward transaction. A higher liability for dividends payment may negatively affect the company's liquidity ratios, but the long-term financial situation is not affected by it. Rather a high dividend payable shows the business is doing well. However, as the dividends payable impacts the company's current ratio adversely, the management needs to be cautious while declaring the dividend. The current ratio needs to be maintained to a certain level to comply with the loan covenants.
Not to be Confused with 'Unclaimed Dividends'
Unpaid dividends are different from unclaimed dividends. When companies pay dividends to their shareholders, they are meant to claim the paid dividend. An unclaimed dividend is recorded when a shareholder fails to claim an already paid dividend while an unpaid dividend is the failure of a company to distribute dividends to shareholders after it has been announced. Shareholders are required to claim dividend within 30 days of when the dividend are declared. When dividends are claimed, shareholders are required by the Internal Revenue Service to disclose the current addition to their income for tax purposes. For shareholders that get their dividends sent to them in checks, they can also have unclaimed dividends if they do not cash the dividend. Unclaimed dividends are kept in separate unpaid dividend account.
Accounting Implications of Unpaid Dividends
Unpaid dividends have certain implications on a company, so also are unclaimed dividends. Both unpaid and unclaimed dividends are recorded as current liabilities on a company's balance sheet. The current liabilities account is cleared when the unpaid and unclaimed dividends are paid. Also, the total amount that a company is to pay as dividend is recorded as dividends payable, this account is reversed only when the company has distributed dividends to its shareholders.