Cumulative preferred shares require that any unpaid dividends accumulate from one year to the next and are payable from future earnings when a dividend is eventually declared by a corporation. These accumulated dividends must be paid before any dividends are paid on common shares. The unpaid dividends are called dividends inarrears. Dividends in arrears are not recorded as a liability on the balance sheet of the company until they have been declared by the board of directors. However, disclosure of dividends in arrears must be made in a note to the financial statements.
If a preferred share is non-cumulative, a dividend not declared by the board of directors in any one year is never paid to shareholders.
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