Question 1

Are dividends an expense for the business, like wages?

Accepted Answer

No. Dividends are not an operating expense and do not appear in the calculation of profit for the year. They are an appropriation of profit, meaning a distribution of profit to the owners (shareholders). They are shown in the Statement of Changes in Equity as a deduction from retained earnings.

Question 2

Can a company pay dividends from its Share Premium account?

Accepted Answer

No, this is a common misconception. The Share Premium account is a capital reserve, not a revenue reserve. It represents capital contributed by shareholders above the nominal value of shares and is not legally distributable as cash dividends. Its uses are restricted, for example, to issuing bonus shares.

Question 3

If a company has authorised share capital of $1,000,000, does this mean it has $1,000,000 in the bank?

Accepted Answer

Not at all. Authorised share capital is simply the maximum nominal value of shares the company is legally permitted to issue. The actual capital raised is the 'issued and paid-up' capital. A company may have authorised capital of $1,000,000 but may have only issued $200,000 of shares, raising cash only for that specific issue.

Question 4

What is the difference between a capital reserve and a revenue reserve?

Accepted Answer

A capital reserve (like Share Premium or Revaluation Reserve) arises from non-trading activities, such as issuing shares or revaluing assets. It is generally not distributable as cash dividends. A revenue reserve (like Retained Earnings) is created from accumulated trading profits and is legally available for distribution as dividends.

Limited companies

What you need to know

Limited companies