A company earns 100 million euro and pays a dividend of 40 million on its ordinary shares.
The income statement shows 100. The dividend never appears in it, because it is a distribution of profit and not an expense. It is debited directly to equity: retained earnings fall by 40 when the dividend is declared, and cash falls by 40 when it is paid.
| Million euro | Income statement | Retained earnings | Cash |
|---|---|---|---|
| Profit for the year | 100 | +100 | |
| Dividend declared | -40 | ||
| Dividend paid | -40 | ||
| Net effect | 100 | +60 | -40 |
Illustrative case, round numbers. Cash from the profit itself is not shown.
The income statement stops at profit. What happens to the profit is recorded in equity.