Track 5 · Equity
Dividends and retained earnings
Record dividend declaration and payment, decide when a dividend becomes a liability, and reconcile retained earnings.
You will be able to
- Calculate a dividend on the shares entitled to it.
- Record declaration, payment and closing of dividends.
- Decide when a dividend is a liability (IAS 10).
- Reconcile opening to closing retained earnings, including a prior-period restatement.
Retained earnings are the accumulated profits a company has kept rather than distributed. They move for three main reasons:
Opening retained earnings + profit (or − loss) − dividends ± prior-period adjustments = closing retained earnings.
Dividends are distributions of profit to shareholders, normally a fixed amount per share. They are not an expense: they're a transaction with owners in their capacity as owners, so they go straight to equity (IAS 32.35) and appear in the statement of changes in equity, never in profit or loss. Only shares outstanding receive dividends — shares the company holds in treasury don't.
When is a dividend a liability? When it is declared — appropriately authorised and no longer at the company's discretion. An interim dividend is usually declared by the directors; a final dividend is commonly proposed by the directors and approved by shareholders at the annual general meeting. Under IAS 10.12–13, a dividend declared after the reporting date is not a liability at that date, even if it relates to the year just ended: it is disclosed in the notes (IAS 1.137).
Recording it: 1. Declaration: debit Dividends declared (or retained earnings directly), credit Dividends payable. 2. Payment: debit Dividends payable, credit Cash. IAS 7 currently lets dividends paid be classified as financing or operating cash flows, applied consistently; IFRS 18's amendments to IAS 7 (from 2027) require most companies to present them as financing. 3. Closing: Dividends declared is a temporary equity account closed to retained earnings at the year end.
Prior-period errors (IAS 8.42) are corrected retrospectively: the comparative amounts for the prior period in which the error occurred are restated (or, if it occurred before the earliest period presented, the opening balances of that earliest period), and the correction never passes through the current year's profit. The statement of changes in equity shows "as previously reported", the correction, and "restated".
Companies may also need distributable profits under local company law before paying a dividend — a legal test that sits alongside the accounting.
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References
- IFRS Foundation — IAS 32 Financial Instruments: Presentation (accessed 2026-10-21)
- IFRS Foundation — IAS 1 Presentation of Financial Statements (accessed 2026-10-21)
Content review: answers and figures are checked by automated tests against the accounting engine, and the text has had an internal review against the standards; independent review by a qualified accountant is pending.