Difference Between Final Dividend and Proposed Dividend

Edited by Diffzy | Updated on: April 30, 2023

       

Difference Between Final Dividend and Proposed Dividend

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Introduction

The final and proposed dividends are essential parts of an organization's fiscal year. Final and proposed dividends are both types of dividends that will be discussed here in detail. Other types of other dividends include cash, property, liquidating, etc. Dividends are the rewards given by a company to its investors and shareholders. The owners of the company are known as the shareholders of the company, and the dividends are distributed among them.

A Company's profits can be reinvested in the business or used to distribute the dividends among the shareholders. Payments can be recorded in the journal. Dividends given to investors encourage them to invest in the company. The final dividend is declared after the finalization of the financial statements. The amount of the final dividend paid to the investors is decided by the management of the company.

The amount of dividend is recorded in the profit and loss report. Auditors are those who record, prepare, audit and finalize the financial statements before the declaration of dividend. The percentage or amount of the dividend paid to the shareholders depends on the financial condition of an organization. The company needs to maintain a record of dividend entries in the equity section of a balance sheet.

Final Dividend Vs Proposed Dividend

The final and proposed dividends are different from each other. The main purpose of distributing the dividend is the growth of an organization and earnings to the investors. An organization announces the final dividend at the AGM based on the profits.

Journal can be used to record the proposed dividend. You need to fill in the relevant details to record the dividend and then click on the Save button. The recorded proposed dividend will appear as a liability on the balance sheet.

Process Of Dividend Declaration

  • All the members should be informed through a notice at least seven days before the board meeting is held.
  • General meeting notice should be given 21 days before the meeting.
  • Ordinary resolution should be passed in the AGM for the announcement of the final dividend to the investors and shareholders.
  • There should be a separate bank account to which the dividend should be credited. The bank account should be open within five working days after the dividend declaration.
  • The final dividend should be received within 30 working days after the declaration. If the dividend remains unpaid, then it should be transferred to another account (unpaid dividend account).
  • If the dividend remains unpaid for more than 5 years, then it can be transferred to the investor protection and education fund.

Difference Between The Final Dividend And Proposed Dividend In Tabular Form

Parameters of ComparisonFinal DividendProposed Dividend
Based on the rate of interest Final dividend usually has a high rate of interest than the proposed dividend. The proposed dividend has a low-interest rate as compared to the final dividend.
Liability The final dividend is not counted in the current liability and is not to be shown in the balance sheet. Working capital is affected by this dividend and the proposed dividend is a current liability and is recorded in the balance sheet.
Accounting Aspect This dividend is announced at the year's end when the accounts are finalized. This dividend is an expected part and proposed by the BOD.
Declaration It is declared by the BOD after the final accounts are edited and prepared. It is recommended by the BOD and announced by the management at the year’s end.

What Is Final Dividend?

The dividend, which is declared from the gains and profits of the company at the end of the year after the preparation of the financial statement, is known as the final dividend. The final dividend is paid in cash. Capital and stocks are not used to pay dividends. On a yearly basis, the final dividend is paid.

Financial statements are prepared to present a fair and true view of the financial performance and position of the business. They are expressed in terms of money. Financial statements show profitability through statements of profit and loss which helps in finalizing the amount of dividend paid to the investors and shareholders.

The BOD and shareholders of a company declare the final dividend of a complete year financial statement. The year-end dividend is a similar term used to pronounce the final dividend because it is declared at the year's end. The final dividend has various features, such as:-

  • Preference and equity stockholders are paid. A company can use the Profits to pay dividends to the shareholders.
  • Not all companies declare dividends. The companies that declare dividends help the shareholders to motivate and be eager to invest in the company.
  • Cash payments should be made. The final dividend can be paid through various sources like profits from the previous and current year. In case of insufficient profits, dividends can be declared from reserves.
  • The final dividend is the greater and bigger amount that is paid once a year. It is also known as the revised final dividend. The final dividend is mostly used in the united states.

Here is an example of a final dividend.

Suppose ABC is a company that decided to issue the final dividend of Rs. 4 per share at the annual meeting, and a shareholder holding 1000 shares of the company will then get Rs. 4000 (as a final dividend). If the company decides to increase the dividend by Rs. 5, the final dividend will be Rs. 9 (Rs. 4 + Rs. 5), and the shareholder will be paid Rs. 9000 as the final dividend.

Pros And Cons Of Final Dividend

The final dividend also has some advantages and disadvantages (pros and cons). Not every company declares the final dividend. The companies that declare regular final dividends have more value and demand in the market because the investors look for such companies to invest their money.

Need For Dividend Distribution

The declaration of the final dividend act as a motivating factor that boosts the confidence level of the shareholders and investors to earn high profits and capital gains. The BOD declares the final dividend that helps the company to maintain consistency and is also responsible for the profits of the company in the future.

The various sources can be considered for paying the dividends such as:-

  1. Profits:- The previous and current year's profits can be used to pay the final dividend after setting all the depreciation and losses.
  2. Any money received from the state government:- A company can utilize the money provided by the state government to pay the dividend.
  3. Reserves:- Reserves can also be used by a company to declare the final dividend to the shareholders. Before using the reserves, the company should fulfill certain terms and conditions, such as the withdrawn amount should not exceed 10 percent of the free reserves and share capital, and the withdrawn amount should be utilized first for setting off the depreciation and losses of the financial year.

What Is Proposed Dividend?

The proposed dividend is the expected amount of dividend which is paid to the investors at the end of the financial year. Dividends are given as a bonus, gain, profits, and rewards to the investors. A company declares dividends only when the company has profits. Timely dividend issuing is beneficial for the investors as well as for the company.

The proposed dividend is a source of financing that provides funds to distribute to the investors and shareholders. The features or characteristics of the proposed dividend include:- no legal formalities required, no financing, and floatation cost needed.

Proposed Dividend Treatment In The Balance Sheet

In case the dividend is proposed, the proposed dividend account should be credited, and the profit and loss account should be debited. The proposed dividend of the holding company must be added to the capital reserve. Here is an illustration to define the treatment of the proposed dividend in the balance sheet.

Show the following items in a company's balance sheet as of 31st March 2020:

8% debentures 5,00,000
Trade payables 1,50,000
Provision for taxation 1,00,000
Proposed dividend 60,000

Solution

Extract Of Balance Sheet ( As of 31st March 2020)

Particulars                                        Note no31st march 2020 (in Rs.)31st march 2019 (in Rs.)
EQUITY & LIABILITIES   
Noncurrent liabilities   
Long term borrowings15,00,000 
Current liabilities   
Trade payables 1,50,000 
Short-term provisions21,60,000 

Note to accounts:-

Long term borrowings 8% debentures5,00,000
Short term provisions 
Provision for taxation1,00,000
Proposed dividend 60,000
 1,60,000

Pros And Cons Of Proposed Dividend

The pros of the proposed dividend are:- no publication is required by the proposed dividend to pay interest, and financing cost is less. The disadvantages of the proposed dividend include:- it is short-term finance provides funds for less time and provides small finance.

The regular dividend-paying companies include banks, basic materials, utilities, healthcare, etc. The startup companies and the companies in the technology sectors may not issue dividends regularly. The proposed dividend is neither a trade payable nor a short-term borrowing. Hence, the proposed dividend is shown under the sub-heading short-term provision in the balance sheet of a company.

Main Differences Between The Final Dividend And The Proposed Dividend in Points

  • At the year's end, the company announces the final dividend, whereas the proposed dividend is an expected part of the final dividend.
  • The final dividend is not counted in the current liability, whereas the proposed dividend is shown as a liability on the balance sheet of a company.
  • The amount of the final dividend is more compared to the proposed dividend. According to the recommendation of BOD, the proposed dividend should be less.

Conclusion

Final and proposed dividends are different based on comparison, and yet both are important. The proposed dividend is not displayed on the balance sheet. The final dividend is prepared by the board of directors and paid every year. Both the dividend play their role and are responsible for the growth of a company.

The final dividend is high compared to other dividends. The financial growth of a company decides the amount of the dividend paid to the investors. A company requires both the dividend (final dividend and proposed dividend).

References

  • https://www.google.com/amp/s/carajput.com/blog/interim-dividend-final-dividend/amp/
  • https://www.indiainfoline.com/knowledge-center/share-market/what-is-final-dividend
  • https://carajput.com/learn/complete-overview-on-interim-and-final-dividend.html

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"Difference Between Final Dividend and Proposed Dividend." Diffzy.com, 2024. Sat. 15 Jun. 2024. <https://www.diffzy.com/article/difference-between-final-dividend-and-proposed-dividend-1160>.



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