What is the status of proposed dividend before it is approved by shareholders in the Annual General Meeting (AGM)?

It is not recognized until it is paid

The correct answer is option 3- It is not recognized until it is paid.

Proposed dividend is not recognised before it is approved by shareholders in the Annual General Meeting (AGM).

As per AS-4, Contingencies and Events Occurring after the Balance Sheet Date, Proposed dividend is shown in the Notes to Accounts. It will be shown as contingent liability since it becomes a liability after it is declared (approved) by the shareholders. It will be accounted in the books of account after it is declared (approved) by the shareholders in the Annual General Meeting. Since, previous year's Proposed Dividend will be declared (approved) in the current year; previous year's Proposed Dividend will be accounted as dividend payable. Also, declared dividend is paid within 30 days of its declaration therefore; it will be paid within the same financial year. Briefly, proposed dividend of previous year after declaration (approved) by the shareholders will be debited to surplus i.e., Balance in Statement of Profit and Loss. While preparing cash flow statement, previous year's proposed dividend will be added to Profit under operating activities and will be shown under financial activity.