Cash dividends are regular payments that some companies make to investors who own their stock. Dividends serve as investment incentives and allow businesses to give a portion of their earnings back to their owners. Businesses may decide to issue dividends, or change the dividend amount, at any time. Dividends paid and dividends payable are two different ways to refer to dividends once the process of issuing them begins.
Dividends payable refers to money that a company is prepared to offer its stockholders as cash dividends, but has not yet paid out. Since dividends come from earnings, dividends payable reserve money that the company already has for distribution to stockholders. Dividends paid are the same payments once they leave the company. These definitions rely on the same accounting terminology as items such as accounts payable, which refers to money a business owes for past purchases but has yet to pay. Each type of dividend has its own place within the financial accounting structure.
The major difference between dividends paid and dividends payable is the timing of each type of transaction. Dividends payable begin to exist when a company's board of directors declares a dividend, on what is known as the declaration date. Dividends payable become dividends paid on the date of payment, which is when the company issues checks to its stockholders. Dividends payable represent future dividends paid, and dividends paid are a record of past payments.
Accounting for Dividends
To businesses, the major difference between dividends payable and dividends paid is a matter of financial accounting. Dividends payable represent money that the company owes to its stockholders. Therefore, it appears on the company's balance sheet as a liability, along with other debts. Dividends paid are neither an asset nor a liability. Instead, they appear on the company's profit and loss, or P&L, statement as appropriations. Dividends paid reduce retained earnings but also eliminate the liabilities that dividends payable create.
Significance to Investors
Investors may not need to differentiate between dividends payable and dividends paid. Both terms refer to different parts of the same process, which results in a check or reinvestment on behalf of a shareholder. However, investors who examine the financial records of businesses can take dividends payable into account. Once a business declares a dividend, its net worth and stockholders' equity are both reduced by the cost of the dividend. Prior to declaring a dividend, the net worth and stockholders' equity are higher. A company that is about to declare a dividend may appear more valuable than it will after paying the dividend.
- DC Productions/Photodisc/Getty Images