A dividend is never an expense: FRS 102 requires distributions to owners to be taken straight to equity, so the debit goes to retained earnings, not the profit and loss account. A final dividend becomes a liability when the shareholders declare it, or on any later payment date the resolution sets, while an interim dividend is only recorded when it is actually paid, including by a credit to a director’s loan account that can be drawn on. A dividend declared after the year end is not a liability at the year end.

Why does a dividend not go through the profit and loss account?

Paragraph 22.17 of FRS 102 says an entity shall reduce equity for the amount of distributions to its owners, meaning the holders of its equity instruments. A dividend is a return to shareholders out of profits already earned, not a cost of earning them. It is therefore deducted from retained earnings (the profit and loss reserve) after profit for the year has been worked out.

The tax position matches. GOV.UK guidance on taking money out of a limited company states that dividends cannot be counted as business costs when working out Corporation Tax. A dividend posted to an expense code inflates costs, understates profit and produces a wrong tax computation, so it is one of the first things a reviewer looks for.

When does a dividend become a liability?

It depends on who approved it and how. Under paragraph 30 of the model articles for private companies (Schedule 1 to the Companies (Model Articles) Regulations 2008), the company may declare dividends by ordinary resolution, a dividend must not be declared unless the directors have recommended its amount, and the directors may decide to pay interim dividends. Companies with bespoke articles should check their own wording.

HMRC’s Company Taxation Manual at CTM15205 sets out the legal position that the accounting follows:

  • Final dividend: a properly declared final dividend that does not specify a payment date creates an immediately enforceable debt. If the resolution sets a later payment date, the debt is enforceable only from that date.
  • Interim dividend: the directors’ decision can be varied or rescinded at any time before payment, so it creates no enforceable debt and is only due and payable when it is actually paid.

So a final dividend is a creditor from the date of the shareholders’ resolution, and an interim dividend should not appear as a creditor at all. It goes from nothing to paid in one step. The page on interim and final dividends covers the company law background in more depth; this page concentrates on the entries.

How is an interim dividend posted?

Because an interim dividend is recognised only on payment, there is a single entry on the payment date:

Account Debit Credit
Dividends paid (equity, closed to retained earnings) Amount of dividend
Bank, or the shareholder’s director’s loan account Amount of dividend

Many small companies do not move cash at all but credit the dividend to the director’s current account with the company. CTM15205 accepts that this is payment if the money is placed unreservedly at the shareholder’s disposal, for instance credited to a loan account they can draw on, and says payment is expected to happen when the entries are made in the company’s books. The same paragraph warns that if those entries are not made until the accounts are prepared after the year end, the dividend is paid in the later period. Posting interim dividends promptly, on the date the directors decide to pay them, keeps the books, the tax year of receipt and the minutes consistent.

How is a final dividend posted?

A final dividend needs two entries because there is a gap between declaration and payment.

  1. On declaration (or the later payment date fixed by the resolution): debit dividends (equity), credit dividends payable within creditors falling due within one year.
  2. On payment: debit dividends payable, credit bank or the director’s loan account.

If the year end falls between the two, the dividend payable is a genuine creditor on the balance sheet because the shareholders already have an enforceable debt.

What if the dividend is declared after the year end?

Paragraph 32.8 of FRS 102 is explicit: if an entity declares dividends to holders of its equity instruments after the end of the reporting period, it shall not recognise them as a liability at the year end because no obligation exists at that time. The amount may be shown as a segregated component of retained earnings at the year end. A final dividend that the shareholders approve at the same meeting as the accounts therefore belongs in the following year’s books, and so does an interim dividend decided before the year end but not paid until after it.

Posting a dividend payable at the year end for a dividend that was only proposed is a common error carried over from older practice. It understates net assets and misstates which period the dividend falls in.

How does it work with numbers?

Illustration only. A company with a 31 March year end and two equal shareholders, both directors, does the following:

  • 15 November: the board decides to pay an interim dividend of £10,000 and credits £5,000 to each director’s loan account the same day. Entry: debit dividends £10,000, credit director’s loan accounts £10,000.
  • 20 March: the board decides on a second interim dividend of £6,000 but nothing is paid or credited before 31 March. No entry this year. It is recorded in the next year when paid.
  • 10 September: the shareholders approve the accounts and declare a final dividend of £8,000 for the year to 31 March, payable on 30 September. No entry in the year to 31 March under paragraph 32.8. In the next year: debit dividends £8,000, credit dividends payable £8,000 on 30 September, then debit dividends payable, credit bank when paid.

The year to 31 March shows dividends of £10,000 in equity and no dividend creditor.

Where do dividends appear in the accounts?

  • Equity statement: paragraph 6.5(b) requires dividends declared and paid or payable during the period to be shown in the statement of income and retained earnings where that statement is used; otherwise they appear in the statement of changes in equity.
  • Small companies: paragraph 1AC.40 requires a small entity to disclose dividends declared and paid or payable during the period.
  • Cash flow statement: where one is prepared, paragraph 7.16 allows dividends paid to be classified as financing cash flows or as operating cash flows.
  • Balance sheet: only a declared but unpaid final dividend appears, within creditors.

What records support the entries?

GOV.UK guidance says that to pay a dividend the directors must hold a meeting to declare it and keep minutes, even if there is only one director, and must prepare a dividend voucher for each payment showing the date, company name, the shareholders being paid and the amount, giving a copy to each recipient. The company must not pay more in dividends than its available profits from current and previous years.

The bookkeeping date should match the minute and the voucher. CTM15205 also notes that the legality of a distribution is judged against the relevant accounts under section 836 of the Companies Act 2006, so management accounts supporting an interim dividend need to be complete enough to show the reserves were there. See how to pay dividends legally and director liability for unlawful dividends.

What mistakes come up most often?

  • Posting dividends to an expense or drawings account inside the profit and loss account.
  • Accruing a dividend payable at the year end for an interim dividend, or for a final dividend declared after the year end.
  • Crediting directors’ loan accounts with dividends at the year end review, months after the minuted date, which moves the payment into a different period.
  • Recording dividends in proportions that do not match the shareholdings when the articles require payment in accordance with shareholders’ rights.
  • Leaving an overdrawn director’s loan account to be cleared by a dividend that the reserves cannot support.

For the shareholder side, see the dividend allowance and tax rates.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.