Dividends are a liability of a corporation only after they have been declared.
Liabilities represent an amount that a company owes to a third party namely a creditor, a supplier or a financial institution, etc. The total liabilities of a company include the long-term debt and current liabilities. The long-term debt is required to be repaid after a period of one year whereas the current liabilities are required to be converted into cash within a period of twelve months.
Answer and Explanation:
Dividends represent the portion of the net income that is distributed to the shareholders as their income on their investment in the company's securities. Dividends can be paid in the form of cash called cash dividend or in the form of stock called a stock dividend. The board of directors declares the dividend in the board meeting held and the shareholders have to adhere to the rate of dividend to be declared. The shareholders cannot increase the rate of dividends decided to be declared by the board but are however eligible to reduce the same.
When the declaration is made, the dividends become a liability for the company and have to be paid within 30 days of its declaration and once it is declared, it cannot be revoked.
The journal entry made at the time of declaration:
As they are payable, they are considered a liability.
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from Finance 101: Principles of FinanceChapter 16 / Lesson 1