Accounting for Dividends
Why Dividends Reduce the Investment
Unlike the fair value method, dividends received under the equity method are not recognized as dividend income. Instead, they reduce the carrying amount of the investment because they represent a return of previously recognized earnings.
- Cash increases.
- Investment account decreases.
- No dividend income is recognized.
Tip
Remember: Income increases the investment; dividends decrease the investment.
Summary
Dividends are viewed as distributions of invested capital rather than new income.