Both are distributions to owners. They aren't costs of doing business, so neither ever appears on the income statement. Each one touches just two statements.
How are dividends and buybacks recorded?
Dividends (T9). When a dividend is declared, retained earnings falls and a liability, "dividends payable", appears. When it's paid, the liability clears and cash leaves via CFF. In our clean models declaration and payment coincide. There are two jurisdiction notes. Under Ind AS, a final dividend is recognized only when shareholders approve it at the AGM, so a March-year-end company's final dividend hits the next year's books. And the CFS shows only dividends actually paid in cash during the year.
Buybacks (T10). Cash leaves via CFF and equity falls. Under US GAAP the company either holds the shares as treasury stock (a contra-equity line at cost, our Sundar Snacks treatment) or retires them, reducing share capital/APIC and charging any excess price to retained earnings. India is different by law. Its Companies Act requires bought-back shares to be extinguished, with no treasury holding outside certain trust structures. Indian buybacks are funded from free reserves or securities premium, and an amount equal to the face value of the shares bought back is transferred to a capital redemption reserve. Taxation of buyback proceeds has also shifted to shareholders' hands as deemed dividend from October 2024. That's a tax fact, and the accounting doesn't change (as of mid-2026).
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Why does equity lag profit at very profitable companies?
Why this tie explains real balance sheets that puzzle beginners. Take Apple (illustrative, modeled on ~FY24 scale. Pull the actual 10-K and its statement of shareholders' equity). Net income was around $94bn and dividends around $15bn. Buybacks ran around $95bn. Apple retired the repurchased shares and charged them largely to retained earnings. Run the T2 roll: RE ≈ opening + 94 − 15 − ~95ish. Retained earnings falls by roughly $15 to 20bn in a year when the company earned $94bn. And sure enough, Apple's retained earnings hovers near zero or negative, even though it's one of the most profitable enterprises in history. Nothing is wrong. Apple simply returns more than it earns, and the linkage makes the balance sheet tell you so.
India's version of the same lesson is gentler. TCS (illustrative, ~FY24 scale. Pull the annual report.) earned roughly ₹46,000 crore and paid out on the order of ₹27,000 crore in dividends, plus periodic large buybacks in other years. So retained earnings and reserves creep up by far less than profits. When you see equity barely growing at a hugely profitable company, your first stop is T2/T9/T10 in the statement of changes in equity. That's the "fourth statement" you met building the balance sheet, where every equity tie is printed in one grid.