A dividend is a distribution made to shareholders that is proportional to the number of shares owned. A dividend is not an expense to the paying company, but rather a distribution of its retained earnings.
There are four components of the financial statements. The following table shows how dividends appear in or impact each one (if at all):
Type of Financial Statement
Impact of Dividends
||Will reduce the balance in the Cash and Retained Earnings accounts once the dividends have been paid|
|Income statement||Dividends have no impact here, since they are not an expense|
|Statement of cash flows
||Reported as a use of cash in the Cash Flow from Financing Activities section|
|Statement of retained earnings*||Reported as a reduction in retained earnings
* Also known as the statement of changes in stockholders' equity
A brief narrative description of a dividend issuance may also be included in the notes that accompany the financial statements, though these notes may not be included if the statements are only issued for internal use.
Before dividends are paid, there is no impact on the balance sheet. Paying the dividends reduces the amount of retained earnings stated in the balance sheet. Simply reserving cash for a future dividend payment has no net impact on the financial statements.
If a dividend is in the form of more company stock, it may result in the shifting of funds within equity accounts in the balance sheet, but it will not change the overall equity balance.