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Where do dividends fit into the income statement / retained earnings? Does net income include / exclude the dividends paid? The breakdown of the relationship between net income and the retained earnings figure on the balance sheet does not seem to shed any light on distribution of income to shareholders. Finally, what about accrued dividends - where do they appear in statements?

Dividends are subtracted from retained earnings. They do not get recorded on the income statement. Net income is stated without any deduction for dividends paid.

So if a company had $1,000,000 in retained earnings at the end of the previous year, and for the current year paid $.50 per share in dividends [on 100,000 shares ($50,000 total)] and had net income for the current year of $250,000, then the new retained earnings balance shown on the balance sheet would be:

$1,000,000 + $250,000 - $50,000 = $1,200,000.

Accrued dividends (dividends declared but not yet paid) are a current liability on the balance shset. They could be shown as dividends payable or dividends declared, but are usually rolled up into other short-term liabilities or the like. Note that a dividend liability is not recorded until the board declares the dividends. If the fiscal year ends on Dec. 31 but the board doesn't meet to declare the next dividend until January 5, there will be no dividend liability on the year-end balance sheet.

Mike
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