When a corporation declares and pays a dividend, the dividend does not reduce the current accounting period’s profit reported on the income statement. In other words, a dividend is not an expense.

Dividends will reduce the amount of the corporation’s retained earnings. Retained earnings are reported in the stockholders’ equity section of the balance sheet.

If a corporation has very profitable uses for its cash, its future profits might be less if it pays dividends instead of reinvesting the cash dividend amounts into profitable projects.

Learn more about Stockholders’ Equity.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the creator of the AccountingCoach Pro which has been praised for its ability to simplify accounting in a way that anybody can understand.

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