Query on basic accounting

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pavankumar (Querist)

17 June 2013 Whether Provision for Dividend account appears on Liability Side only when there is Profit & Loss A/c Credit Balance?

Please guide me.

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)

23 June 2013 Please elaborate your query.

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

10 August 2024 **Provision for Dividend Account in Accounting**

**1. **General Principle:**
- **Provision for Dividend** is a liability that appears on the liability side of the balance sheet. It represents the amount set aside by a company from its profits to pay dividends to shareholders.

**2. **Impact of Profit & Loss Account Balance:**
- **Profit & Loss Account Credit Balance:** Typically, a provision for dividend is made when the company has a profit that allows for such a distribution. In this case, the provision is recorded on the liability side of the balance sheet.
- **Profit & Loss Account Debit Balance:** If the company has a loss, it would not make a provision for dividend. Instead, the focus would be on addressing the loss and potentially not declaring a dividend.

### **Accounting Treatment:**

**1. **Profit & Loss Account Credit Balance:**
- When the Profit & Loss Account shows a credit balance (i.e., net profit), the company may declare dividends. The provision for dividend is recorded in the liability side to reflect the amount expected to be distributed.
- **Journal Entry for Provision of Dividend:**
```
Debit: Profit & Loss Appropriation Account
Credit: Provision for Dividend Account
```

**2. **Profit & Loss Account Debit Balance:**
- If the Profit & Loss Account has a debit balance (i.e., a loss), the company generally would not declare a dividend. In such cases, the company would focus on addressing the loss. No provision for dividend would be made.
- **If Dividend is Declared Despite a Loss:**
- This situation is unusual and may require specific disclosures. It could indicate financial distress or a deliberate policy decision.

### **Summary of Key Points:**

1. **Provision for Dividend** generally appears on the liability side of the balance sheet when the company has a net profit and intends to distribute dividends.

2. **When There is a Profit:**
- The provision for dividend will be recorded as a liability to reflect the company's commitment to pay dividends.

3. **When There is a Loss:**
- The company typically does not make a provision for dividends. Instead, efforts would be focused on addressing the loss.

4. **Exception:**
- If the company declares dividends despite having a loss, it would still show the provision for dividend, but this is not standard practice and would need to be disclosed and justified in financial statements.

**Conclusion:**
Provision for dividend typically appears on the liability side when there is a profit in the Profit & Loss Account. If there is a loss, the company would not normally create a provision for dividend.

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