How is the previous year's Proposed Dividend treated once it is declared and approved by shareholders?

It is debited to surplus in the Statement of Profit and Loss

The correct answer is option 3- It is debited to surplus in the Statement of Profit and Loss.

The previous year's Proposed Dividend is debited to surplus in the Statement of Profit and Loss, once it is declared and approved by shareholders.

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 Act Profit under operating activities and will be shown under financial activity.