Financial Accounting · Capital structure and finance costs

Dividends and Their Accounting Treatment in ACCA FA

Updated 11 October 2026 · Fact-checked

A dividend is a distribution of profit to shareholders. Under IFRS you recognise it as a liability only when it is declared or approved and no longer at the company's discretion. You then debit retained earnings in the statement of changes in equity and credit dividends payable or cash. Proposed dividends after the year end are not liabilities.

Understand Dividends and Their Accounting Treatment

A dividend is a share of profit paid to the owners of a company. It is not an expense. It does not appear in the statement of profit or loss. It is a distribution of profit, so it reduces retained earnings and is shown in the statement of changes in equity (SOCIE).

Ordinary dividends are paid to ordinary shareholders. The amount is decided by the directors and, for a final dividend, approved by shareholders. There is no fixed entitlement. The company can pay nothing in a poor year.

Preference dividends are paid at a fixed rate on the nominal value of preference shares. How you treat them depends on the type of share. For redeemable preference shares, which are classified as liabilities under IAS 32, the dividend is a finance cost in profit or loss. For irredeemable preference shares classified as equity, the dividend is a distribution shown in the SOCIE, like an ordinary dividend.

Timing matters. An interim dividend is paid during the year, so it is recognised when paid. A final dividend is proposed by directors after the year end and approved by shareholders at the annual general meeting. Under IAS 10, a dividend declared after the reporting date is not a liability at that date, because no obligation exists then. It is disclosed in the notes only.

So the key test is simple: was the dividend declared or approved on or before the year-end date? If yes, record it. If not, disclose it only. In FA questions, a final dividend 'proposed' after the year end is the classic trap.

Key formulas to remember

Ordinary dividend: Dividend = number of shares × dividend per share; Use the number of shares in issue, not the nominal value amount, unless the question gives a rate on nominal value.
Dividend on nominal value: Dividend = nominal value of shares × dividend rate; Used for preference shares, for example 5% on $200,000 of shares = $10,000.
Entry when dividend is paid: Dr Retained earnings (SOCIE) Cr Cash; Applies to interim dividends and final dividends paid in the year.
Entry when dividend is declared but unpaid at year end: Dr Retained earnings (SOCIE) Cr Dividends payable (current liability); Only if declared or approved on or before the reporting date.
Redeemable preference dividend: Dr Finance costs (P&L) Cr Cash or accrued liability; Treated as interest because the shares are a liability under IAS 32.
Closing retained earnings: Opening retained earnings + profit for the year − dividends recognised in the year; Dividends recognised, not dividends proposed after the year end.

How to solve Dividends and Their Accounting Treatment questions

Use this method for any question asking how a dividend is shown in the financial statements.

1Identify the type of share: ordinary, irredeemable preference (equity) or redeemable preference (liability).
2Calculate the dividend amount from the shares in issue and the rate or amount per share given.
3Find the date it was declared or approved and compare it with the reporting date.
4If it was paid or declared on or before the reporting date, recognise it. If declared after, do not recognise it and only disclose it.
5For ordinary and equity preference dividends, debit retained earnings in the SOCIE. For redeemable preference dividends, charge finance costs in profit or loss.
6Credit cash if paid, or dividends payable if declared but unpaid.
7Update the statements: SOCIE and cash or current liabilities. Check profit for the year is unaffected by equity dividends.

Quickest way: The date test

When to use it: Use this in multiple choice and number entry questions where you must choose the amount recognised or the liability at year end.

Underline the reporting date and the dates of each dividend in the question.
Include only dividends paid or declared on or before that date.
Ignore any final dividend proposed after the year end, except for disclosure.
Check whether the preference shares are redeemable. If so, move that dividend to finance costs.
Add up the amounts and calculate shares × rate carefully before choosing your answer.

Common mistakes in Dividends and Their Accounting Treatment

Accruing a proposed final dividend as a liability at the year end
Students think a dividend relating to this year's profit must be recorded this year.
Fix: Apply IAS 10. If it was not declared or approved by the reporting date, there is no obligation. Disclose it in the notes only.
Charging an ordinary dividend in profit or loss
Students treat any payment out of the business as an expense.
Fix: Dividends are distributions of profit. Show them in the SOCIE, never in profit or loss (except redeemable preference dividends, which are finance costs).
Treating all preference dividends the same way
Students remember 'preference dividend' but forget the share classification.
Fix: Check whether the shares are redeemable. Redeemable means liability and finance cost. Irredeemable equity shares mean a distribution.
Calculating dividends on nominal value when a per-share amount is given, or the reverse
Mixing up a rate (%) and an amount per share.
Fix: A rate applies to nominal value. A cents or dollars per share amount applies to the number of shares.
Forgetting dividends payable when a declared dividend is unpaid
Students credit cash by habit.
Fix: Credit cash only for amounts actually paid. Credit dividends payable for the unpaid part and show it in current liabilities.

Worked examples

Example 1

At 31 December, Alder Co has 400,000 ordinary shares of $1 each. During the year it paid an interim dividend of $0.05 per share. After the year end, on 20 February, the directors proposed a final dividend of $0.12 per share, approved by shareholders on 15 April. The financial statements were authorised on 10 March. What dividend is shown in the SOCIE for the year, and what liability is recognised at 31 December?

Show the solution

Interim dividend: 400,000 × $0.05 = $20,000. It was paid in the year, so it is recognised.
Final dividend: proposed and approved after the year end, so there was no obligation at 31 December.
Under IAS 10, the final dividend is not recognised. It is disclosed in the notes: 400,000 × $0.12 = $48,000.
Entry for interim: Dr Retained earnings $20,000, Cr Cash $20,000.

Answer: SOCIE shows dividends of $20,000. No dividend liability is recognised at 31 December. The $48,000 final dividend is disclosed in the notes only.

Example 2

Birch Co has opening retained earnings of $310,000 and profit for the year of $95,000. It has 200,000 ordinary shares of $1 each and $100,000 of 6% irredeemable preference shares classified as equity. During the year it paid the preference dividend in full and an ordinary dividend of $0.10 per share. What is closing retained earnings?

Show the solution

Preference dividend: $100,000 × 6% = $6,000. As the shares are equity, it is a distribution, not a finance cost, so profit of $95,000 is unchanged.
Ordinary dividend: 200,000 × $0.10 = $20,000.
Total dividends recognised: $6,000 + $20,000 = $26,000.
Closing retained earnings = $310,000 + $95,000 − $26,000 = $379,000.

Answer: Closing retained earnings are $379,000.

Exam tips

In objective test questions, find the reporting date first. It decides which dividends count.
Read the wording for 'redeemable'. One word changes the dividend from a distribution to a finance cost.
Remember that equity dividends never reduce profit for the year. They reduce retained earnings through the SOCIE.
For multiple response questions on IAS 10, select only statements that match: declared after year end means disclose, not recognise.
In Section B accounts preparation, include a dividends line in the SOCIE. In the FA statement of cash flows, dividends paid on equity shares are shown in financing activities, and redeemable preference dividends are treated as interest paid.

Practice questions from Capital structure and finance costs

Dividends and Their Accounting Treatment: frequently asked questions

Is a proposed dividend a liability in the financial statements?

Not if it is proposed or declared after the reporting date. IAS 10 says no obligation exists at the year end, so it is disclosed in the notes only. A dividend that was declared or approved on or before the reporting date and is unpaid is a current liability.

What is the difference between an interim and a final dividend in accounting?

An interim dividend is paid during the year. It is recognised when paid, or when its payment is committed and no longer at the company's discretion. A final dividend is proposed by the directors and recognised only when shareholders approve it. If approval comes after the year end, it is not a liability at that date and is disclosed only.

Where do dividends paid appear in the SOCIE?

They appear as a deduction in the retained earnings column, for the dividends recognised during the year. They do not appear in profit or loss.

How do you treat preference dividends in ACCA FA?

It depends on the share classification. Dividends on redeemable preference shares are finance costs in profit or loss. Dividends on irredeemable preference shares classified as equity are deducted in the SOCIE.