Finance Formulas / July 7, 2018 / Aniyah Booth
An individual starts a business and incurs startup costs of $50,000. During the first year of operation, the business earns a profit of $75,000. If the individual had stayed at his previous job, he would have made $30,000. In this example, the accounting profit is $25,000, or $75,000 - $50,000. However, because the individual had the potential to earn income at another location while retaining the startup costs of the business, an economic loss of $5,000, or $25,000 - $30,000, is incurred. Although an accounting profit occurred, the individual would have made a larger profit if he had stayed in his previous position.
A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in proportion to their shareholding. For the joint-stock company, paying dividends is not an expense; rather, it is the division of after-tax profits among shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholders' equity section on the company's balance sheet - the same as its issued share capital. Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends. Cooperatives, on the other hand, allocate dividends according to members' activity, so their dividends are often considered to be a pre-tax expense.
We Also Think You’ll Like