4. Dividends

Question 1

What is the journal entry to record an equity dividend?

Answer 1

The journal entry to record an equity dividend paid is:

Debit - Retained earnings
Credit - Bank/cash

Question 2

Where are dividends paid on irredeemable preference shares taken from?

Answer 2

Dividends paid on irredeemable preference shares are taken from retained earning in the same way as equity dividends and are therefore deducted from retained earnings. This is the case because irredeemable preference share capital is a component of equity.

Question 3

How are dividends paid on redeemable preference shares accounted for?

Answer 3

Dividends paid on redeemable preference shares are treated as a finance cost (interest) in the period and are therefore included in the statement of profit or loss. This is the case because redeemable preference shares are presented as liabilities on the statement of financial position.

Question 4

What is the equation for retained earnings?

Answer 4

Opening retained earnings + profit for the year (or - loss for the year) - dividends paid in the year.