Distributable Reserves

These are retained profits which at the discretion of the directors may be declared as dividends.

Recall: Reseves are profits amounts not declared as dividend. They are normally put aside for the
future growth of the company.

Dividends payable: These are recognised as a liability to shareholders.

Care must be taken and the juristic nature/persona of a limited company must be considered. Since
shareholders cannot initiate the payment of dividends the company as a legal persona must and can
initiate payment of dividends.

Treatment of dividend not paid

Dividends declared after the balance sheet date are not a liability to the company at the balance
sheet date.

ACCOUNTING ENTRIES

Dr preference dividend

Cr dividend payable

Narration: declaration of pref dividend

Dr dividend payable

Cr bank

Payment of ordinary dividend