Dividend rate and bank interest come under fixed cost?? or..?

Question

Hi folks!

Is dividend rate and bank interest u pay come under fixed cost or....how do you calculate it when you do financial evaluation.

do i need to subtract this to get the actual profit?

am very bad in finance..please some one explain

thank you

bharath.

Answer 1

Fixed costs are such items as Rent for business premises which have to be paid regardless of the number of units produced. Variable costs are those which will change according to the quantity of units produced. If a business receives a dividend on its investment in shares in another entity or receives interest on money on deposit, this is considered as Income (Revenue) and would appear in the Revenue Statement (Profit and Loss Statement). When a business pays interest on borrowed funds this is an Expense and would also appear in the Revenue Statement.

I will repeat here information I have given to others that should be quite useful.

Firstly you need to understand the accounting equation which is Assets = Liabilities + Owners Equity

Secondly that Accounting is based upon this equation and that as a result for every Debit entry there must be a corresponding Credit entry to balance the equation.

Thirdly, every financial transaction will involve at least two accounts. One account will have a debit entry while the other will have a balancing credit entry.

Fourthly that the accounts are kept for the business entity and that the value of all the assets of the business are owed either to creditors or the owners.

All financial transactions are firstly recorded in the Journal. Somebody doing this work will identify the accounts affected and make the appropriate debit and credit entries there. At any time the Journal will show that the total balances in the debit and credit columns are the same. At the end of any accounting period, In order to produce the Balance Sheet and Profit and Loss statements all the Journal entries for that period are 'Posted' to their respective Ledger accounts. The balances in each Ledger account is then transferred to the Balance sheet - this is done either directly or indirectly via the Profit and Loss statement. All Assets and Liabilities go directly to the Balance Sheet while the Revenue and Expense ledger balances will wind up in the balance sheet via the Profit and Loss statement. Now because each financial transaction was recorded using the accounting equation all the debit entries had corresponding credit entries, hence the total Ledger debit entries must equal the total Ledger credit entries. When all these Ledger balances are finally transferred to the Balance Sheet the Assets must then equal Liabilities plus Owners Equity. This is why it is called a Balance Sheet ( it has to balance).

In time you will be able to identify items as assets, liabilities and owners equity. Also you will identify items as revenue or expenses.

Assets are Cash, Inventory, Buildings, Equipment, Debtors (money owed to the business). Liabilities are Borrowed funds, Creditors (money owed for goods and services supplied to the business), money contributed by the owners of the business (Owners equity), retained profits/losses, mortgages, other loans made to the business, overdrafts. Revenue items are Sales, Interest earned on funds on deposit in bank accounts etc. Expenses include Rent, Insurance premiums paid, wages , salaries, cost of electricity, gas, motor vehicle running costs (petrol, oil, repairs and servicing, registration and insurance), stationery, advertising.

The Balance Sheet will usually show assets as

Current Assets

Cash on hand or in Bank

Inventory

Debtors

Non- Current Assets

Buildings

Office Furniture and Equipment

Motor Vehicles

Machinery

The Balance Sheet will usually show Liabilities as

Current Liabilities

Creditors

Bank Overdraft

Short Term Borrowings

Non- Current Liabilities

Mortgages

Owners Equity

Capital

Retained Profit (Loss)

The Profit and Loss statement has five main sections, they are:

Sales Revenue

Minus Cost of Goods Sold

Gross Profit

Minus Expenses

Net Profit(or Losss)

Answer 2

Interest is a fixed cost if borrowing is on a fixed rate of interest, but it does not become a variable cost when your interest rate is variable, because its variation is not based on business volume. This leaves it still in the category of fixed expenses despite its variability.

Dividends are not an expense. They are a distribution from (not of) shareholder equity.

Even when a corporation borrows to pay a dividend, it is still a distribution from equity, even when equity is negative.  Dividends reduce owner equity and cash.

Dividends are in a sense independent of profits except in the sense that one needs to have some profits to sustain a flow of dividends.

Bank interest charges, or bond interest if we issue bonds, is part of out profit or loss computation.

With a preferred share, we pay a 'dividend' that is in effect an interest payment if the company has earnings. But this too is not an interest expense, but a dividend. It too is paid from equity after profit is added into the owner equity account.