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Does a dividend reduce profit?

Author:
Harold Averkamp, CPA, MBA

Definition of Dividend

A dividend declared by a corporation is a distribution to its stockholders of the profits the corporation had earned. Since the dividends are not an expense, the dividends do not reduce the corporation’s net income (earnings, profits).

Dividends will reduce the corporation’s retained earnings which is reported in the stockholders’ equity section of the balance sheet. (A cash dividend also reduces the corporation’s current asset Cash.)

Example of a Dividend

Assume a corporation declares and pays a cash dividend of $2 on its 300,000 shares of common stock outstanding. This $600,000 distribution of cash will reduce the balances in two of the corporation’s balance sheet accounts:

  • The current asset account Cash is reduced by $600,000
  • The stockholders’ equity account Retained Earnings is reduced by $600,000

No income statement account was affected by the dividend.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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