Dividends

What dividends covers

Dividends are distributions of profit to shareholders. They are not an expense — they reduce retained earnings, not profit. The liability arises when the dividend is declared, not when it is paid, and preference dividends generally rank ahead of ordinary ones, which matters when earnings available to ordinary shareholders are calculated.

These challenges cover declaration and payment entries, cumulative preference arrears, and the effect on retained earnings.

Where marks are usually lost

• Recording a dividend as an expense in the income statement.
• Recognising the liability at payment date rather than declaration date.
• Ignoring arrears on cumulative preference shares when allocating a distribution.