Accrued Dividend: is the dividend that a company has declared to pay to its shareholders but has yet to make the payment.
Accrued Dividends Details
Accrued dividends are dividends that shareholders have already earned, although it has yet to be paid. This happens when the board of directors of a publicly-traded company approves dividends, but the dividends are yet to be paid to the shareholders.
Under the Generally Accepted Accounting Principles (GAAP), which most companies in the Western world use, the accrued dividends are recorded as a liability in the company’s financial documents. It becomes a liability from the day the dividends are declared until the day they are paid. It is recorded as a liability because it is an expense that the company is going to make. It is an obligation to fulfill.
On the other hand, shareholders will view accrued dividends as income and may record it under their accounts receivable in their financial books.
Although accrued dividends are yet to be paid to the shareholder, it does not create a creditor-debtor relationship between the shareholder and the company. According to USLegal.com, “the right to accrued dividends is merely a preference as against the common stockholders and the right to receive such dividends does not come into existence until their payment is properly authorized and directed by declaration or otherwise. [Cox v. Sellers, 26 Del. Ch. 350 (Del. Ch. 1942)].”
However, accrued dividends become the shareholders' property after declaration; and are considered separate from the stock of the shareholders. This way, when there is a merger or other significant corporate event, the shareholder is treated as a creditor to the corporation due to their accrued dividends. This treatment only occurs when there is a merger or acquisition or some other major corporate action.
Examples of Accrued Dividend
So how can you calculate accrued dividends, either as a company or as a shareholder? It is pretty straightforward, and the examples illustrate how to calculate accrued dividends.
An electric car infotainment software company, J & Hans had its board meeting in September after the end of its third quarter. The board of directors approved and declared dividends of $0.25 per share to all common stockholders. The number of shares outstanding for J & Hans is 21 million. As an accountant in J & Hans, find the total accrued dividends of J & Hans.
The total accrued dividends are obtained by multiplying the dividend per share with the total shares outstanding. So if the dividend per share is D, and the total shares outstanding is T, then the total accrued dividends, S will be given by S = D * T.
The dividend per share, D = $0.25
and the total outstanding shares, T = 21 million.
So the total accrued dividend will be given by:
S = D * T
S = $0.25 * 21 million
S = $5.25 million
So the total accrued dividends for J & Hans is $5.25 million.
Mr. Jack has invested in a car manufacturing company called Plasta. Five years ago, he acquired 250,000 of their stock. At the end of the first half of this year, Plasta declared a dividend per share of $0.32 per share to be paid at the end of August. Mr. Jack wants to know his accrued dividends so he can record it in his financial book. How will Mr. Jack calculate his accrued dividends?
The method of calculating the accrued dividend for a company is similar to when calculating for a shareholder. The only difference is that for shareholders, the total outstanding shares is replaced with the number of shares owned by the shareholder.
The dividend per share is D,
And the number of shares held by the shareholder is M,
Then the total accrued dividend of the shareholder will be L.
L = D * M
The dividend per share is $0.32, so D = $0.32
The total shares owned by Mr. Jack is 250,000, so M = 250,000
L = D * M
L = $0.32 * 250,000
L = $80,000
So the total accrued dividend to Mr. Jack is $80,000. Mr. Jack can therefore go ahead and record $80,000 in his accounts receivable, or other assets account.