Accrued Dividend (Accumulated Dividend) - Explained
What is an Accumulated Dividend?
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Table of ContentsWhat is an Accrued Dividend?How is an Accrued Dividend Recorded?Types of Preferred Cumulative StockExamples of an Accrued DividendAcademic Research on Accrued Dividend
What is an Accrued Dividend?
An Accrued Dividend, also known as an accumulated dividend is a dividend whose payment date is due but it has not been paid to the shareholder. The dividend is retained by the issuer until paid, so it is accrued or accumulated.
Accumulated dividends are common with preferred stock. The preferred shareholder accumulates the right to payment of a dividend until it is paid in the future. These accumulated dividends must be paid before common shareholders receive a newly declared dividend.
How is an Accrued Dividend Recorded?
The accrued dividend is a type of dividend that is declared and due to being paid to the shareholders of the company, but it is still showing as unpaid on the books.
Generally, since the accumulated dividend is a dividend in arrears, it is credited as a liability in the company's balance sheet. The retained earnings accounts is debited to make credits and debits match.
Types of Preferred Cumulative Stock
This type of dividend is generally applied in context to the holders of cumulative preference shares. Preferred cumulative stock exists in the following two forms:
- Cumulative stock-This type of preferred cumulative shares has guaranteed dividends. This means that whether or not the firm is able to pay the dividends, the shareholder must earn dividends. The dividend payment can either be made immediately or at a future date. The cumulative dividend is usually created when a company is not able to pay dividends to the shareholders. Also, investors may decide to leave their dividend to accumulate so that they can earn guaranteed returns. This makes them preferred stockholders whose dividends must be given, preference when dividends are being paid out.
- Non-cumulative stock-In this type of preferred cumulative stock, shareholders are paid dividends only after it has been declared by the company. This means that the shareholders of non-cumulative stock can either get the dividends or miss it. It all depends on how the shares trade in the stock market during the trading period.
Examples of an Accrued Dividend
Firm ABC has issued a number of preferred shares of $2 per share whose cumulative dividend is done quarterly. Firm ABC also has a number of outstanding common stock which the firm paid a dividend of $1 per share for the last quarter. In addition, there is a recession in place and the board has suspended dividend payment because the firms cash flow has been affected. In such a situation, the preferred shares would have accumulated dividends. When firm ABC finally decides to pay out dividends to its shareholders, it must first start with the preferred shareholders. This means they are paid all their accumulated dividends before the other shareholders are given. This must be paid in full because if not, it will continue to create the same obligation to the company.