Question

Why cant dividends be an expense (use GAAP) in your answer.

Answer 1

Dividends are not considered an expense. For this reason, dividends never appear on an issuing entity's income statement as an expense. Instead, dividends are considered a distribution of the equity of a business. As such, dividends are subtracted from the equity section of the balance sheet, and are also subtracted from the cash line item in the balance sheet, resulting in an overall decline in the size of the balance sheet. If dividends have been declared but not yet issued, then they are stated as a current liability on the balance sheet. Dividends that have been paid within the reporting period are also listed within the financing section of the statement of cash flows as a cash outflow.

If a stock dividend is issued instead of cash, this represents a re-allocation of funds between the additional paid-in capital and retained earnings accounts. This is simply a reshuffling of amounts within the equity section of the balance sheet. Thus, stock dividends are also not considered an expense.