Usually, board of directors of company declares dividend in annual general meeting after finding the real net profit position. If boards of directors give dividend for current year before closing of that year, then it is called interim dividend. This dividend is declared between two annual general meetings.
Before declaring interim dividend, board of directors should estimate the net profit which will be in future. They should also estimate the amount of reserves which will deduct from net profit in profit and loss appropriation account. If they think that it is sufficient for operating of business after declaring such dividend. They can issue but after completing the year, if profits are less than estimates, then they have to pay the amount of declared dividend. For this, they will have to take loan. Therefore, it is the duty of directors to deliberate with financial consultant before taking this decision.
Accounting treatment of interim dividend in final accounts of company :-
# First Case : Interim dividend is shown both in profit and loss appropriation account and balance sheet , if it is outside the trial balance in given question.
( a) It will go to debit side of profit and loss appropriation account
(b) It will also go to current liabilities head in liabilities side.
# Second Case: Interim dividend is shown only in profit and loss appropriation account, if it is shown in trial balance.
( a) It will go only to debit side of profit and loss appropriation account.
If in final declaration is given outside of trial balance and this will be proposed dividend and interim dividend in trial balance will be deducted for writing proposed dividend in profit and loss appropriation account and balance sheet of company, because if we will not deducted interim dividend, then it will be double deducted from net profit that is wrong and error shows when we will match balance sheets assets with liabilities.
When Board of directors of company declares dividend in annual general meeting after finding the real net profit position and financial position through financial statements. That declared dividend is called final dividend. It is totally different from Interim Dividendbecause final dividend is based on actual profit instead of estimation of future profit.
Accounting treatment of interim dividend in final accounts of company :-
To show in profit and loss appropriation account : If final dividend is given outside the trial balance, we will calculate it on the basis of equity shares. It will be debited to the profit and loss appropriation account after deducting interim dividend which has already shown in trial balance.
To show in balance sheet : We will also show same final dividend to the liabilities side of balance sheet under the heading of provisions because it is just like current liabilities because next year, it will be show in the trial balance when we will pay it.
Final Dividend Problem
Adjustments outside the Trial balance
Wholesales Traders Pvt. Ltd. company declared final dividend @ $ 5 per share after seeing its final profitability position.
Trial balance shows
interim dividend 16800
issued capital (of Rs. 10 per ) Rs. 420000
Solution
To show 420000/10 X 5 - 16800 = 193200 in profit and loss appropriation account and in the liabilities side of balance sheet as final dividend payable.
Accounting treatment of interim dividend in final accounts of company :-
To show in profit and loss appropriation account : If final dividend is given outside the trial balance, we will calculate it on the basis of equity shares. It will be debited to the profit and loss appropriation account after deducting interim dividend which has already shown in trial balance.
To show in balance sheet : We will also show same final dividend to the liabilities side of balance sheet under the heading of provisions because it is just like current liabilities because next year, it will be show in the trial balance when we will pay it.
Final Dividend Problem
Adjustments outside the Trial balance
Wholesales Traders Pvt. Ltd. company declared final dividend @ $ 5 per share after seeing its final profitability position.
Trial balance shows
interim dividend 16800
issued capital (of Rs. 10 per ) Rs. 420000
Solution
To show 420000/10 X 5 - 16800 = 193200 in profit and loss appropriation account and in the liabilities side of balance sheet as final dividend payable.
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