Usually, board of directors of company declares dividend in annual general meeting after finding the real net profit position. If boards of directors give dividend for current year before closing of that year, then it is called interim dividend. This dividend is declared between two annual general meetings.
Before declaring interim dividend, board of directors should estimate the net profit which will be in future. They should also estimate the amount of reserves which will deduct from net profit in profit and loss appropriation account. If they think that it is sufficient for operating of business after declaring such dividend. They can issue but after completing the year, if profits are less than estimates, then they have to pay the amount of declared dividend. For this, they will have to take loan. Therefore, it is the duty of directors to deliberate with financial consultant before taking this decision.
Accounting treatment of interim dividend in final accounts of company :-
# First Case : Interim dividend is shown both in profit and loss appropriation account and balance sheet , if it is outside the trial balance in given question.
( a) It will go to debit side of profit and loss appropriation account
(b) It will also go to current liabilities head in liabilities side.
# Second Case: Interim dividend is shown only in profit and loss appropriation account, if it is shown in trial balance.
( a) It will go only to debit side of profit and loss appropriation account.
If in final declaration is given outside of trial balance and this will be proposed dividend and interim dividend in trial balance will be deducted for writing proposed dividend in profit and loss appropriation account and balance sheet of company, because if we will not deducted interim dividend, then it will be double deducted from net profit that is wrong and error shows when we will match balance sheets assets with liabilities.