To determine the accounting treatment of preference shares and dividend on such shares, first you have to identify if preference shares are redeemable or irredeemable.
Accounting treatment for redeemable preference shares
If preference shares are redeemable then shares are reported as liability in statement of financial position. This is an interesting fact that although they are termed as shares but in nature they are liability as entity has to retrieve the shares at a particular date by paying agreed amount to the holder of redeemable shares.
And dividend paid on redeemable preference shares is recorded as expense in income statement as any return paid towards liabilities is treated as an interest expense in the income statement (profit or loss item).
Accounting treatment for irredeemable preference shares
Irredeemable preference shares are such shares that entity don’t have to retrieve and in this case they are like ordinary shares. Therefore, they are recorded as part of equity in the statement of financial position.
As irredeemable preference shares are part of equity therefore, any return paid on such shares is treated as distribution of profits and reported in statement of changes in equity.