Question

Dividends, you have learned, are a distribution of income, not an expense. What is the difference? Why can’t the corporation list them as an expense, since dividends are just another amount of money paid out to somebody?

Answer 1

An expense is basically a cost incurred by the company for earning revenue.

Whereas, a dividend is not an expense incurred by the company for earning that revenue. It is an appropriation/ distribution of the net income (Revenue - Expenses) earned by the company.

Hence, dividend is NOT an expense. It is a proportion of profit which the company decides to distribute amongst its shareholders.

Also, the amount of dividend to be paid is not fixed. It can vary each year, as per company's discretion. Company can even decide to not pay dividend for a particular year. Hence, it cannot be considered as an expense.

Hope this helps..do get back to me if you have any further queries!