Content Standard 14.4

Cash Dividends

Dividen tunai

One-hour paid trial · Same-day reply · from RM50/hr

Explanation

A dividend is the portion of a limited company's profit distributed to shareholders as a return on their investment. A cash dividend means a dividend paid in the form of money (through the Bank), as opposed to a share dividend, which is paid by issuing additional shares. The source of dividend payments is distributable profit, that is, profit after tax accumulated in the Retained Earnings account (Untung Tertahan). A company cannot pay dividends out of share capital because share capital is protected under the capital maintenance principle. The decision to declare a dividend is made by the Board of Directors, while a final dividend must be approved by the shareholders at the Annual General Meeting (AGM).

There are two main types of cash dividend based on the timing of declaration: interim dividends and final dividends. An interim dividend is a dividend declared and paid by the Board of Directors in the middle of the financial year, usually when the company has earned satisfactory profit before the annual accounts are finalised; it does not require shareholder approval because the directors are empowered to declare it. A final dividend is a dividend proposed by the directors at the end of the financial year based on the full-year profit, and it can only be paid after being approved by shareholders at the AGM. Because approval is obtained after the reporting date, a proposed final dividend is normally disclosed as a note to the accounts and is not recognised as a liability at the balance sheet date.

Cash dividends are also distinguished by class of share: preference shares and ordinary shares. Preference shareholders receive a dividend at a fixed rate (for example 6% per year) stated when the shares are issued, and they have priority to be paid before ordinary shareholders. Ordinary shareholders receive a variable dividend that depends on the level of profit and the directors' decision, and they are paid after the preference dividend is satisfied. Because of this higher risk, ordinary shareholders may receive a larger return when the company makes a big profit, but may receive no dividend at all in a loss year.

Cash dividends are calculated with simple formulas, but the working must be precise. The preference share dividend is calculated as the preference dividend rate multiplied by the paid-up preference share capital. The ordinary share dividend can be calculated in two ways: either the percentage rate multiplied by the paid-up ordinary share capital, or cents per share multiplied by the number of ordinary shares issued. When dividends are stated as interim and final, the total ordinary dividend for the year is the interim dividend plus the final dividend. Always use paid-up (issued) capital, not authorised capital, in your calculations.

Dividends in arrears arise when a company fails to pay the dividend on cumulative preference shares in a given year. For cumulative preference shares, unpaid dividends accumulate and must be settled in later years before any dividend can be paid to ordinary shareholders. In contrast, non-cumulative preference shares do not allow arrears; if the dividend is not declared in a year, the right to that year's dividend is lost permanently. Dividends in arrears are not a liability in the statement of financial position until they are declared, but they must be disclosed in a note to the accounts so that users of the financial statements know the company's accumulated obligation to cumulative preference shareholders.

Worked examples

Example 1: Calculating preference and ordinary share dividends

Cahaya Murni Bhd has the following paid-up capital on 31 December 2024: 200,000 6% preference shares at RM1 each (RM200,000) and 500,000 ordinary shares at RM1 each (RM500,000). The directors declare an ordinary dividend of 8%.

Preference dividend = 6% x RM200,000 = RM12,000.

Ordinary dividend = 8% x RM500,000 = RM40,000.

Total cash dividend paid = RM12,000 + RM40,000 = RM52,000.

Double entry when the dividend is paid: Debit Dividend (Retained Earnings) RM52,000; Credit Bank RM52,000. This dividend is deducted from Retained Earnings in the Statement of Changes in Equity.

Example 2: Interim and final dividends

For the year ended 31 December 2024, Cahaya Murni Bhd (500,000 ordinary shares of RM1) paid an interim ordinary dividend of 3% on 30 June 2024 and the directors proposed a final ordinary dividend of 5%.

Interim dividend = 3% x RM500,000 = RM15,000. Paid in June 2024.

Double entry (interim paid): Debit Interim Dividend RM15,000; Credit Bank RM15,000.

Proposed final dividend = 5% x RM500,000 = RM25,000. Because it is not yet approved at the AGM, it is only disclosed as a note and is not recorded as a liability on 31 December 2024.

Total ordinary dividend for the year = RM15,000 + RM25,000 = RM40,000.

Example 3: Dividends in arrears (cumulative preference shares)

Sinar Bayu Bhd issued 100,000 7% cumulative preference shares of RM1 (RM100,000). The annual preference dividend = 7% x RM100,000 = RM7,000. In 2023 the company made a loss and did not pay the preference dividend, so RM7,000 became dividends in arrears.

In 2024 the company is profitable and wishes to clear all arrears. Amount payable to preference shareholders = 2023 arrears (RM7,000) + current 2024 dividend (RM7,000) = RM14,000.

Double entry (2024): Debit Preference Dividend RM14,000; Credit Bank RM14,000. Only after this RM14,000 is settled are ordinary shareholders entitled to a dividend. If the preference shares were non-cumulative, the RM7,000 arrears from 2023 would be lost and only the RM7,000 for 2024 would be paid.

Practice

Bina Jaya Bhd has paid-up capital of 300,000 5% preference shares at RM1 and 800,000 ordinary shares at RM1. The directors declare an ordinary dividend of 6%. Calculate the total cash dividend payable and show the double entry.

Answer: Preference dividend = 5% x (300,000 x RM1) = 5% x RM300,000 = RM15,000. Ordinary dividend = 6% x (800,000 x RM1) = 6% x RM800,000 = RM48,000. Total cash dividend = RM15,000 + RM48,000 = RM63,000. Double entry when paid: Debit Dividend (Retained Earnings) RM63,000; Credit Bank RM63,000. The dividend is deducted from Retained Earnings in the Statement of Changes in Equity.

Explain the difference between an interim dividend and a final dividend in terms of timing of declaration and approval requirement.

Answer: An interim dividend is declared and paid by the Board of Directors in the middle of the financial year before the annual accounts are finalised; it does not require shareholder approval because the directors are empowered to declare it. A final dividend is proposed by the directors at the end of the financial year based on full-year profit and can only be paid after being approved by shareholders at the Annual General Meeting (AGM). Because approval is obtained after the balance sheet date, a proposed final dividend is disclosed as a note and is not recognised as a liability at the reporting date.

Teguh Murni Bhd issued 150,000 8% cumulative preference shares of RM1. In 2023 no dividend was paid. In 2024 the company intends to settle all preference dividends. How much must be paid to preference shareholders in 2024, and what happens if the shares are non-cumulative?

Answer: Annual preference dividend = 8% x (150,000 x RM1) = 8% x RM150,000 = RM12,000. Because the shares are cumulative, the unpaid 2023 dividend (RM12,000) becomes arrears and must be settled together with the 2024 dividend. Amount paid in 2024 = 2023 arrears (RM12,000) + current 2024 dividend (RM12,000) = RM24,000. Double entry: Debit Preference Dividend RM24,000; Credit Bank RM24,000. If the shares were non-cumulative, the 2023 arrears would be lost and only the 2024 dividend of RM12,000 would be paid.

Seri Wangi Bhd (600,000 ordinary shares of RM1) paid an interim ordinary dividend of 4% in July 2024 and the directors propose a final ordinary dividend of 7% on 31 December 2024. Calculate the interim dividend, final dividend and total ordinary dividend for the year, and state the accounting treatment of the final dividend.

Answer: Interim dividend = 4% x (600,000 x RM1) = 4% x RM600,000 = RM24,000, paid July 2024. Entry: Debit Interim Dividend RM24,000; Credit Bank RM24,000. Proposed final dividend = 7% x RM600,000 = RM42,000. Total ordinary dividend for the year = RM24,000 + RM42,000 = RM66,000. Accounting treatment of the final dividend: because it is not yet approved at the AGM on the balance sheet date, it is only disclosed as a note to the accounts and is not recognised as a liability on 31 December 2024; it is recorded when approved and paid.

Exam tips

Key terms

Cash dividend (Dividen tunai): A portion of company profit distributed to shareholders in the form of money through the Bank.
Interim dividend (Dividen interim): A dividend declared and paid by the Board of Directors mid-year without requiring shareholder approval.
Final dividend (Dividen akhir): A dividend proposed at the end of the financial year, payable only after approval by shareholders at the AGM.
Dividends in arrears (Dividen tertunggak): Unpaid cumulative preference dividends from earlier years that must be settled before ordinary dividends are paid.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 5

Need help with Cash Dividends?