Dividends Payable (Accounting) Definition
Corporations distribute a part of their after-tax revenue among the shareholders of the company in accordance with the number and class of share. It is known as the dividend. After the announcement of the dividend by the board of the directors, the dividend amount is recorded as the dividend payable within current liabilities. It remains as a current liability until it is actually paid to the shareholders. It is almost always a confidential and short-term liability.
Example of Dividend Payable Transaction
For example, company X announces $3 dividend to its shareholders holding 100,000 outstanding shares of common stock. Let’s 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.
References for Dividends Payable
Academic Research on Dividends Payable
- · Reconciliation of net income to cash flow from operations: An accounting equation approach, Rai, A. (2003). Journal of Accounting Education, 21(1), 17-24. Using basic accounting principles, this article shows how to reconcile net income to cash flow from operating activities. This introduction helps give students a better understanding of cash flow calculations with a step-by-step analysis.
- · Some optimal dividends problems, Dickson, D. C., & Waters, H. R. (2004). ASTIN Bulletin: The Journal of the IAA, 34(1), 49-74. This article expands on a 1957 situation regarding a surplus process modified by introducing a constant dividend barrier. The known results are extended showing how a discrete time risk model and be used to create approximate results when more accurate figures aren’t available.
- · A theory of optimal capital structure, Scott Jr, J. H. (1976). The Bell Journal of Economics, 33-54. This paper uses comparative statistical analysis and a multiperiod model of firm valuation to find an optimal capital structure. This model assumes that the probability of bankruptcy is zero. Implications for debt policy are also considered.
- · The value added statement in Britain, Morley, M. F. (1979). Accounting Review, 618-629. This paper takes a look at the Value Added (VA) statement, a new statement that began to appear on British financial reports in the late 1970s. This article looks at the structure of the VA statement, its underlying theory and the practical methods for finding the figures contained within. This piece is an excellent way to introduce the VA statement to a student or beginner.
- · Dividends-Changing Patterns, Kreidmann, A. M. (1957). Colum. L. Rev., 57, 372. This article offers a look at the historic statutes and accounting treatments related to dividends, and then brings the discussion to current times with an examination of modern accounting methods and legislative rulings. This resource is beneficial to both novices and experienced analysts.
- · A financial analysis of the national air traffic services PPP, Shaoul, J. (2003). Public Money and Management, 23(3), 185-194. This article takes a critical look at the collapse of the National Air Traffic Services (NATS) Public-Private Partnership (PPP). The author shows that the NATS PPP was not financially viable, even before the downturn in air traffic following September 11th.
- · Non-cumulative preferred stock, Berle, A. A. (1923). Non-cumulative preferred stock. Columbia Law Review, 23(4), 358-367.
- This author of this article attempts to clear up misconceptions about non-cumulative preferred stock. The article asserts that non-cumulative preferred stock is less popular because of misconceptions about the rights it offers to shareholders. The author explains the rights and benefits conferred by the stock through careful analysis of real-world examples.
- · Earned Surplus. Its Meaning and Use in the Model Business Corporation Act, Seward, G. C. (1952). Virginia Law Review, 435-449.
- This article from the mid-1950s offers an explanation of the earned surplus by taking a look at the accounting standards of the time. The context of the Model Business Corporation Act helps to define this term and practice.
- · Discretion of Directors in the Distribution of Non-Cumulative Preferred Dividends, Stevens, W. H. S. (1935). Geo. LJ, 24, 371. This article examines the latitude that firm directors are able to exercise when making decisions regarding the payment of dividends. Both the information used to make this determination and the implications of those decisions are discussed.
- · Modeling and measuring Russian corporate governance: The case of Russian preferred and common shares, Goetzmann, W. N., Spiegel, M., & Ukhov, A. (2003). (No. w9469). National Bureau of Economic Research. This article finds that corporate control issues and conflicts between shareholder classes may be at least partially responsible for the discount of preferred to common shares in the Russian stock market. The authors employ models and empirical data to make their case.