When a portion of the company’s profits are paid out to shareholders, it is termed a dividend. Dividends used to be the main purpose for investors to purchase company stock. Investors had hoped to be paid in dividends. Often companies decide to reinvest the money into the company, while shareholders and investors hope that the revenue will increase. In this case, the shareholders would sell their shares for more than what they originally paid, thus earning a good return on their investment. When a company is not doing well it might prefer to pay out dividends to its shareholders. This article will show you how to declare dividends on a balance sheet. This article applies to American investors. Other countries have different business and tax laws.
Items you will need
- Board of Directors/ Director
- Balance Sheet
- Receipt papers
Declare and record your dividends
First, take a look at what a balance sheet looks like. This link provides you with an example of a balance sheet. When looking at a balance sheet you may find that some companies use unfamiliar terms. To find the meaning of these terms, a resource link to an online investor dictionary is provided at the end of this article.
Determine the type of dividend you will pay out. Cash dividends have some advantages. Consider a shareholder with a small portfolio. If the shareholder invested in an income producing equities with average dividend yield (say 5%), then a market drop of 20% wouldn't concern the shareholder because psychologically the shareholder would be satisfied with the annual check paid out to the shareholder, for an amount like $25,000 at the end of the year.
Determine a declaration date, whereby the board of directors will announce the company’s intention to pay a dividend. After declaring your date, go ahead and write the dividends into the balance sheet under the “Liability” column. You may have your accountant help you with this.
Look at financial statements other than the balance sheet including, the income statement and cash flow statement. The income statement will tell you how much a company made or lost. The cash flow statement will tell you how much was made or lost. Comparing the three financial statements tells you how much is left over for shareholders.
Instruct the Board of Directors to announce a date of record and date of payment.
Use an online calculator to determine the payout for your dividend yields (see resources). When returning money to shareholders, make sure to classify this type of dividend as “return of capital”. Return of capital dividends are “tax-free”.