How to calculate and record dividends

Accounting for Companies Limited by Shares

What you need

• The company's share capital structure: the number and nominal (par) value of ordinary and preference shares.
• The fixed preference dividend rate and the declared ordinary dividend rate or amount (sen per share or a percentage).
• Net profit after tax for the current year and the retained profit balance at the start of the year.
• Familiarity with the appropriation section format of the Income Statement and basic double entry.

Step by step

1. 1

   Identify the share capital structure

   List each class of shares with its number and nominal value. Example: Perniagaan Setia Berhad has 200,000 ordinary shares of RM1 each (capital RM200,000) and 100,000 6% preference shares of RM1 each (capital RM100,000). Net profit after tax for the year is RM50,000 and retained profit at 1 January is RM20,000. Dividends are always calculated on the nominal value of share capital, never on the market price of the shares.

2. 2

   Calculate the preference dividend

   The preference dividend is a fixed rate multiplied by the nominal preference share capital. For Perniagaan Setia: 6% x RM100,000 = RM6,000 for a full year. Because the company pays a half-year interim dividend first, split it: interim preference dividend = 3% x RM100,000 = RM3,000, and the remaining final preference dividend = 3% x RM100,000 = RM3,000.

3. 3

   Calculate the ordinary dividend

   The ordinary dividend is a rate per share multiplied by the number of shares issued. The interim is declared at 3 sen per share: 200,000 x RM0.03 = RM6,000. The final dividend proposed is 5 sen per share: 200,000 x RM0.05 = RM10,000. Total ordinary dividend is RM16,000. Check: total of all dividends = RM3,000 + RM6,000 + RM3,000 + RM10,000 = RM22,000.

4. 4

   Record the interim dividend already paid

   An interim dividend is recorded when it is paid through the bank. For the interim preference payment: Debit Interim Dividend (Preference) RM3,000; Credit Bank RM3,000. For the interim ordinary payment: Debit Interim Dividend (Ordinary) RM6,000; Credit Bank RM6,000. Both interim dividend accounts are transferred to the appropriation section at year end.

5. 5

   Record the proposed final dividend

   The final dividend is only proposed at year end and not yet paid, so it becomes a current liability. Entry: Debit Appropriation section of the Income Statement RM13,000; Credit Proposed Final Dividend RM13,000 (RM3,000 preference + RM10,000 ordinary). The Proposed Final Dividend account is carried to the Statement of Financial Position as a current liability.

6. 6

   Prepare the appropriation section of the Income Statement

   Start with net profit after tax RM50,000, add the opening retained profit RM20,000, giving RM70,000. Deduct all dividends: interim preference RM3,000, interim ordinary RM6,000, proposed final preference RM3,000, and proposed final ordinary RM10,000 (total RM22,000). Retained profit carried forward = RM70,000 - RM22,000 = RM48,000.

7. 7

   Present in the Statement of Financial Position

   Under Owner's Equity, show Ordinary Share Capital RM200,000, Preference Share Capital RM100,000 and Retained Profit RM48,000. Under Current Liabilities, show Proposed Final Dividend RM13,000. The interim dividend of RM9,000 does not appear as a liability because it was already paid through the bank during the year.

Second example

Kedai Runcit Harmoni Berhad issued 300,000 ordinary shares of RM1 each and 50,000 8% preference shares of RM1 each. No interim dividend was paid this year. At year end, the board proposed the full preference dividend and an ordinary dividend at a rate of 10%. Proposed preference dividend = 8% x RM50,000 = RM4,000. Proposed ordinary dividend = 10% x RM300,000 = RM30,000. Neither has been paid, so the entry is Debit Appropriation section RM34,000; Credit Proposed Final Dividend RM34,000, and the total of RM34,000 is reported as a current liability in the Statement of Financial Position.

Notice the difference: the ordinary dividend may be declared as sen per share (as in Perniagaan Setia) or as a percentage of ordinary share capital (as in Harmoni). Both methods work on the nominal capital. The preference rate, however, is always fixed and does not change whether profit is high or low, so it is calculated before the ordinary dividend.

Common mistakes

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