What Is an Accrued Dividend?
An accrued dividend is a term referring to balance sheet liability that accounts for dividends on common stock that have been declared but not yet paid to shareholders. Accrued dividends are booked as a current liability from the declaration date and remain as such until the dividend payment date. Accrued dividends and "dividends payable" are sometimes interchanged by companies in name. Accrued dividends are also synonymous with accumulated dividends, which refer to dividends due to holders of cumulative preferred stock.
- An accrued dividend—also known as dividends payable—are dividends on a common stock that have been declared by a company but have not yet been paid to shareholders.
- A company will book its accrued dividends as a balance sheet liability from the declaration date until the dividend is paid to shareholders.
- Should a company fail to make a dividend payment, this creates accumulated dividends, which are listed on the company's balance sheet as a liability until they are paid.
- Accumulated dividends are dividends on shares of cumulative preferred stock that have not been paid to the shareholder.
- Shareholders of cumulative preferred stock receive dividends before shareholders of common stock and other classes of preferred stock.
Understanding Accrued Dividends
When a dividend is declared by a company the accrued dividend (or dividend payable) account is credited and the retained earnings account is debited in the amount of the intended dividend payment. There are no accounting rules that mandate a time frame in which the accrued dividend entry should be recorded, though most companies usually book it a few weeks before the payment date.
After the dividend is declared, it becomes the property of the record-date shareholder and is considered separate from the stock. This separation allows the shareholders to become creditors of the company, due to their dividend payment, should a merger or some other corporate action occur.
The declaration date is the date on which a company's board of directors announces the next dividend payment, including the dividend amount, ex-dividend date, and payment date.
Calculating Accrued Dividends
To calculate a company's accrued dividend, you'll need to know the number of shares outstanding and the amount of the dividend per share. You can find these numbers on the investor relations website page for most publicly traded companies or on a financial site that provides stock quotes. To figure a company's accrued dividend, multiply the number of shares outstanding by the dividend per share.
A company will pay its shareholders dividends on a specified date at regular intervals, frequently every quarter. In some cases, however, a company may not be able to pay dividends to its shareholders. An unexpected downturn in business, for example, could lead a company to suspend dividend payments and instead use its funds to sustain the business during the financial crisis.
This scenario creates accumulated dividends, which are listed on the company's balance sheet as a liability until they are paid. An accumulated dividend is an unpaid dividend on a share of cumulative preferred stock. This type of preferred stock stipulates any skipped dividends must be paid to its holders before common shareholders can receive dividends. Thus, once financial conditions improve and the company is able to pay dividends again, shareholders of cumulative preferred stock will receive their dividends before all other shareholders.
Accrued dividends for common stock do not typically show up as a separate line item under current liabilities on a company's balance sheet. The Walt Disney Company, for example, tucks these dividends payable under "accounts payable and other accrued liabilities." The amount of the dividend that will be paid in the future is located in the statement of shareholders' equity. Accrued dividends on preferred stock, if any, may be found in the notes to financial statements.