Difference Between Dividend and Interest (7 Points) | Important Article
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Difference Between Dividend and Interest
Meaning of Dividend
It is that part of the profits of the company which is distributed amongst its shareholders. Dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared b the company.’
Definition
The Institute of Chartered Accountants of India has defined Dividend as, “a distribution to shareholders out of profits or reserves available for this purpose.”
Meaning of Interest
In financial terms, it is a payment made for using money of another. i.e. Borrower takes money from the lender.
So interest is the cost of renting money, for the borrower and it is the income from lending money for the lender.
- Difference Between Fixed Capital and Working Capital
- Difference Between Owned Capital and Borrowed Capital
- Difference Between Debenture and Share
- Difference Between Preference Shares and Equity Shares
Difference Between Dividend and Interest
| Points | Dividend | Interest |
| 1) Meaning | Dividend is the return payable to the shareholders of the company for their investment in the share capital. | It is the return payable to the creditors of the company viz. Debenture holder / Deposit holders for the loan given b them to the company. |
| 2) Given to whom | It is paid to the member i.e. the owners of the company. | It is paid to the creditor of the company. |
| 3) Obligation | It is to be paid only when company has made profits. Therefore no obligation / compulsion to pay dividend. | It is not linked to the profits of the company. Payment of interest is an obligation and is to be paid b the company compulsorily. |
| 4) When Payable | It is payable when a company earns sufficient profit in a year after fulfilling all obligations. | It is payable every year irrespective of the profits of the company. |
| 5) Rate | It is paid at a fluctuating rate to the equity shareholders since it is linked to the profits of company. | Rate of interest is fixed and pre- determined at the time of issue of the security. |
| 6) Resolution | Payment of Final Dividend requires a Board resolution and an ordinary resolution at the AGM while Interim Dividend can be paid b passing only a Board Resolution. | Payment of interest does not require passing of a resolution at any meeting. |
| 7) Accounting Treatment / Aspect | Dividend is an appropriation of profit. | Interest is a charge on profit. |
