A dividend is a share of the company’s profit paid to its shareholders, and it is deducted from retained profit, not from expenses. To explain one from supplied statements, you find the figure, check how it is expressed, and say what it does to the business.
This lesson builds on interpreting retained profit and belongs to company accounting.
How do you read a dividend in a question?
Dividends reach you in three forms. Read the wording closely, because each needs a different step.
| The question gives | What to do |
|---|---|
| Total dividend in RM | Use it as it is |
| Dividend per share | Multiply by the number of shares |
| Dividend as a % of nominal value | Take the percentage of total share capital |
Shares have a nominal value, such as RM 1 each. A 5% dividend on RM 1 shares is 5 sen per share.
Then ask three questions: how much is it, what share of the year’s profit does it use, and what is left in the business afterwards?
Worked example
Sentosa Bakery Ltd has 80,000 ordinary shares of RM 1 each. Profit for the year is RM 9,600 (tax is ignored, as the question states).
The directors pay a dividend of 4 sen per share. Opening retained profit is RM 15,000.
Step 1, find the total dividend. 80,000 × RM 0.04 = RM 3,200.
Step 2, express it as a percentage of nominal value. Share capital is 80,000 × RM 1 = RM 80,000. Then 3,200 ÷ 80,000 = 0.04, so the dividend is 4%.
Step 3, find the share of profit paid out. 3,200 ÷ 9,600 = 1/3, so one third of the profit was paid to shareholders.
Step 4, find what stays in the business. 9,600 − 3,200 = RM 6,400 kept.
Step 5, update retained profit. 15,000 + 9,600 − 3,200 = RM 21,400.
Step 6, write a sentence that explains it. “Sentosa Bakery paid RM 3,200 in dividends, one third of its RM 9,600 profit, and retained RM 6,400, so retained profit rose from RM 15,000 to RM 21,400.”
A good explanation names the figures and states the effect. It makes no claim beyond what the statements show.
The mistake to watch for
A frequent error is to put the dividend in the income statement as an expense.
Mistaken income statement: Profit before dividend RM 9,600, less dividend RM 3,200, gives profit for the year RM 6,400.
The student treated the dividend as a cost of trading. Profit for the year is understated by RM 3,200, and retained profit then looks as though it has been reduced twice.
The correction is to find profit for the year first, at RM 9,600, and then deduct the dividend in the retained profit workings. The dividend rewards owners from profit already earned. It is not a cost needed to earn that profit.
Check yourself
Try these, then open each answer.
1. A company has 60,000 shares of RM 1 each and pays a dividend of 5% of nominal value. Find the total dividend and the dividend per share.
Show answer
Share capital is RM 60,000. 5% of 60,000 = 60,000 × 5/100 = RM 3,000. Per share: 3,000 ÷ 60,000 = RM 0.05, which is 5 sen.
2. A company pays RM 2,400 in dividends on 40,000 shares. Find the dividend per share.
Show answer
2,400 ÷ 40,000 = RM 0.06, which is 6 sen per share.
3. Profit for the year is RM 8,000 and the dividend is RM 2,000. What percentage of profit is retained?
Show answer
Retained from this year: 8,000 − 2,000 = RM 6,000. Then 6,000 ÷ 8,000 = 0.75, so 75% of the profit is retained and 25% is paid out.
Where this leads next
With dividends and retained profit clear, you can put the pieces together in preparing a simple company statement within scope. The double-entry and ledger trainer is useful for the dividend entry, and the percentage-base explorer shows which figure each percentage is taken from.
If your explanations lose marks because the figures are right but the sentence is vague, online one-to-one Accounting tuition gives you a teacher to practise those sentences with.