Distinguish Between Dividend and Interest | 12th HSC Secretarial Practice (S.P.) Chapter 10
The distinction between Dividend and Interest is one of the easiest and highest-scoring questions from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 10: Dividend and Interest. In the HSC Board Examination, this question regularly appears under Question 4 (Distinguish Between) carrying 4 Marks. Below is the complete, textbook-accurate tabular solution strictly aligned with the latest Balbharati Textbook and official board marking scheme.
Board Exam Marking Scheme Tip: Each Distinguish Between question in Q.4 carries 4 Marks (1 mark per valid point). Always present your answer in a neat 3-column table including the Basis of Distinction. Write at least 5 to 6 clear points (starting with Meaning, Given to Whom, Obligation, and Rate) to guarantee a full 4 out of 4 score!
Distinguish Between: Dividend and Interest
| Sr. No. | Basis of Distinction | Dividend | Interest |
|---|---|---|---|
| 1. | Meaning | Dividend is the return payable to the shareholders of the company as a share in the distributable profits for their investment in the company's share capital. | Interest is the return (monetary charge) payable to the creditors of the company who have lent money to the company. |
| 2. | Given to Whom | It is paid to the members (owners) of the company — i.e., Equity Shareholders and Preference Shareholders. | It is paid to the creditors (lenders) of the company — i.e., Debenture Holders, Depositors, Bondholders, and Banks. |
| 3. | Obligation | It is not a compulsory obligation. It is linked to the profits of the company; there is no statutory obligation to pay dividend when there are no profits. | It is a compulsory legal obligation. It is not linked to the profits of the company; the company must pay interest unconditionally every year even if it suffers a loss. |
| 4. | When Payable | It is payable only when the company earns sufficient profit after fulfilling all statutory obligations and providing for depreciation. | It is payable unconditionally at fixed, pre-determined intervals (annually, half-yearly, or quarterly) regardless of the company's profit or loss. |
| 5. | Rate | It is paid at a fluctuating rate to equity shareholders (since it is linked to company profits), though preference shareholders receive a fixed rate. | The rate of interest is fixed and pre-determined at the time of issuing the security or taking the loan. |
| 6. | Resolution | Payment of Final Dividend requires a Board Resolution (recommendation) and an Ordinary Resolution passed at the Annual General Meeting (AGM). Interim Dividend requires a Board Resolution. | Payment of interest is a contractual obligation and does not require passing any resolution at any Board Meeting or General Meeting. |
| 7. | Accounting Aspect | Dividend is an "Appropriation of Profit" (paid out of Net Profit after tax). Hence, it does not reduce the taxable income of the company. | Interest is a "Charge on Profit" (treated as a business expense before calculating tax). Hence, it is a tax-deductible expense for the company. |
Quick Memory Trick to Remember All Points in the Exam
Memory Shortcut (Mnemonic — "MG-OW-RRA"):
Remember these 6 easiest points from the Balbharati textbook to write in under 4 minutes:
1. Meaning (Return Paid on Share Capital vs. Return Paid on Borrowed Capital)
2. Given to Whom (Paid to Members / Shareholders vs. Paid to Creditors / Debenture Holders & Depositors)
3. Obligation (Not Compulsory / Linked to Profits vs. Compulsory Legal Obligation)
4. When Payable (Only When Company Earns Sufficient Profit vs. Payable Even if Company Suffers Loss)
5. Rate (Fluctuating Rate for Equity Shares vs. Fixed & Pre-determined Rate)
6. Accounting Aspect (Appropriation of Profit vs. Charge on Profit / Business Expense)
Key Concept Summary for Objective Questions (Q.1)
- Appropriation vs. Charge: In accounting and corporate finance, Dividend is an "Appropriation of Profit", whereas Interest is a "Charge against Profit".
- Modes of Payment: Both Dividend and Interest can be paid either physically by issuing a Dividend Warrant / Interest Warrant or electronically through ECS (Electronic Clearing Service) or NEFT (National Electronic Funds Transfer).
- Cannot Be Paid Out of Capital: Under Section 123 of the Companies Act, 2013, a company can never declare or pay Dividend out of Capital; it must strictly be paid out of profits.