Finance is a vast subject with several branches. The modern business world is changing rapidly in terms of its functioning. One has to be familiar with the terminologies associated with the finance world. By understanding various financial terms and the mechanism in which it functions, one can reach great heights.
This website, ‘Simplified Fiscal Affairs’ presents to you the various topics/concepts in the form of series and imparts the knowledge in a simplified way.
What is Dividend?
Dividend is the appropriation out of the profits of the company. It is distributed among the shareholders of the company. The term dividend is derived from a Latin word “Dividendum” which means that which is to be divided. Dividend is the part of the annual net profit of the company which is appropriated among the shareholders of the company.
Features of Dividend:
- It is the part of annual net profit which is distributed among its shareholders.
- Dividend is payable out of net profits of the company after providing for depreciation.
- Dividend cannot be paid out of capital.
- It is an unconditional payment made by the company.
- Dividend is payable only to the shareholders of the company.
- Preference shareholders receive a fixed rate of dividend, whereas, the equity shareholders receive dividend as per the net profits of the company.
- Dividend as recommended by the Board of Directors is approved and declared by resolution passed in the Annual General Meeting by the shareholders.
- The rate of dividend, amount of dividend to be distributed, book closure date, record date, date of AGM is discussed by passing a resolution in the board meeting.
- Shareholders may declare or lower rate of dividend than what is recommended by the board but not higher than that.
- Dividend once approved and declared by the shareholders of the company, creates an obligation on the part of the company, it cannot be reversed.
- The company has to deposit the dividend amount in a separate bank account opened in a schedule bank called as dividend account within 5 days of its declaration.
- Dividend is to be paid in cash.
- Dividend is always paid on the paid-up share capital of the company.
- The payment of dividend is not an expenditure of the company, as it is a payment made to its shareholders.
What is Interest?
Interest refers to a certain amount of money paid on borrowed capital. It is the payment made for using money of another, which is the borrowed money. It is the price paid for the productive services rendered by capital.
It is the cost of finance for borrowing and it is the revenue from lending money, for the lender. Interest is the monetary charge for borrowing the money which is expressed as an annual percentage of the principal value.
Interest is in direct proportion to risk, higher the risk is, higher would be the rate of interest. It is determined by various factors like money supply, financial policy, the volume of borrowings, inflations.
Interest is an obligation against the profits of the business. It is a fixed payment which needs to be paid irrespective of the company makes profits or not. Company has to make payments, if it has borrowed money from creditors like debenture holders, deposit holders, bond holders, etc.
You can calculate the amount of your interest payable using the Simplifiedfiscalaffairs’ EMI Calculator to reach the right conclusions.
How does it work?
The mechanism of the payment of interest is such that, it is the cost of renting money. The term Interest comes under borrowed capital.
When a person has the requirement of a specific sum of money, he takes up the money on credit basis, like, loan, credit cards. The person who lends the money is known as the lender, whereas, the person who borrows the money is known as the borrower. The lender of the money charges a fixed amount of interest on the principal value, for lending the money. The payment of interest is a cost, to the borrower, whereas, income to the lender.
At the end of the period, the principal value is repaid along with the interest money which is known as the total amount. The percentage or rate of interest is directly proportional to the risk associated; higher the risk, higher will be the rate of interest and vice-versa.
FOR EXAMPLE: Financial securities like bonds, debentures, deposits, loans carry a fixed and pre-determined rate of interest.