Cumulative Preferred Dividends in Arrears Should Be Shown in a Corporation's Balance Sheet as What?

Preferred stock and common stock are disclosed in the stockholders’ equity section on the balance sheet. Each type of preferred stock is individually listed under the preferred stock category heading. Under Generally Accepted Accounting Principles, you must disclose how many common and preferred stock shares you authorized and issued. The amount of any dividends you paid out during the accounting period is listed on the balance sheet. The way you disclose cumulative preferred dividends in arrears depends on whether the dividends are declared or undeclared.

While preferred stock normally pays regular dividends, cumulative preferred stock takes this one step further. If you miss making a dividend payment, that amount is carried over to the next scheduled dividend payment date. Your cumulative preferred stockholders do not lose out on any omitted or skipped dividends because the dividends accumulate. To get caught up, you pay the oldest dividends first until you reach the current amount due. Cumulative preferred stockholders must receive all of their dividend payment first before other preferred stockholders and common stockholders receive their dividends.

The schedule of payments lists the dates your cumulative preferred stockholders will receive their dividends. These scheduled dividends are an obligation your company must honor sometime in the future. However, a scheduled dividend is an undeclared dividend. Under GAAP, an undeclared stock dividend is not a recognized liability. You do not disclose undeclared stock dividends on the balance sheet. If you miss an undeclared stock dividend, you disclose the dividend in arrears as a footnote on the balance sheet. The disclosure lists the scheduled dividend payment date and the amount of the missed payment.

Cumulative preferred dividends go from being a balance sheet footnote to a recognized liability when your board of directors declares a dividend. The dividends are accounted for in the Dividends Payable account in the current liabilities section on the balance sheet. You can open a separate account for the current cumulative preferred dividends and those dividends in arrears. Once the dividends are declared, they are no longer disclosed as a balance sheet footnote.

When you declare a dividend, you must pay the cumulative preferred dividends in arrears first followed by the current dividends. For example, say you have $15,000 in retained earnings – $10,000 cumulative preferred dividends in arrears and $5,000 in current cumulative preferred dividends. Because you must pay the dividends in arrears first, record the cumulative preferred dividend payment by debiting Dividends Payable-Cumulative Preferred Dividend Arrearage for $10,000 and crediting Cash for $10,000. Next, record the current dividend payment by debiting Dividends Payable-Cumulative Preferred for $5,000 and crediting Cash for $5,000. Because there are no funds remaining, the other preferred and common stock shareholders do not receive their dividend payment.