9706 · 3.1.5
Limited Companies: Financial Statements — FAQ
Frequently asked questions for 9706 Limited Companies: Financial Statements. Direct answers first, then deeper explanation — then practise with marking.
Why is directors' remuneration an expense but dividends are not?
Directors' remuneration is a payment to them for their service of managing the company, making it an operating expense similar to any other employee's salary. Dividends, on the other hand, are a distribution of profits to the owners (shareholders) of the company. They are a return on investment, not a cost of running the business.
What's the difference between an interim dividend and a final dividend?
An interim dividend is declared and paid during the financial year, based on the company's performance to date. A final dividend is proposed by the directors after the financial year has ended and must be approved by shareholders at the Annual General Meeting (AGM). In the financial statements for the year, both interim dividends paid and final dividends proposed are deducted in the Statement of Changes in Equity.
If a company makes a loss, can it still pay a dividend?
Generally, a company can only pay dividends out of its accumulated distributable profits (retained earnings). If a company makes a loss in the current year but has sufficient retained earnings from previous years, it may still be able to pay a dividend. However, if it has no retained earnings, it cannot legally pay a dividend.