On 15 July 2023, Linh Do Accounting Firm paid a cash dividend that had been declared prior to the end of its June 30, 2023 financial year. The entry to pay the dividends includes a debit to:

Question

On 15 July 2023,  Linh Do Accounting Firm paid a cash dividend that had been declared prior to the end of its June 30, 2023  financial year. The entry to pay the dividends includes a debit to:

BlackTom AI · Accepted Answer

The scenario describes paying out a cash dividend that was previously declared. In the accounting records, the liability created when the dividend was declared is Dividends payable. When the company pays the dividend, it reduces this liability and reduces cash. 
Option 1: 'retained earnings and a credit to dividends payable' is incorrect because dividends payable is a liability account, and paying the dividend does not credit retained earnings; instead, it reduces cash and eliminates the liability. 
Option 2: 'cash and a credit to dividends payable' is incorrect in the sense that it states cash is debited, but the payment should decrease cash, i.e., cash should be credited, not debited, and the corresponding debit should be to Dividends payable to remove the liability. 
Option 3: 'dividends payable and a credit to cash' correctly reflects the event: a debit to Dividends payable to reduce the liability, and a credit to Cash to reflect the outflow of cash. 
Option 4: 'dividends payable and a credit to retained earnings' is incorrect because paid dividends reduce the liability and cash; they do not directly credit retained earnings, which is a permanent equity account affected only through closing processes or distributions via the liability mechanism. 
In summary, the appropriate journal entry to pay a previously declared dividend is a debit to Dividends payable and a credit to Cash, aligning with the reduction of the liability and the cash outflow.

BACC012 Week 8: Practice Quiz

On 15 July 2023, Linh Do Accounting Firm paid a cash dividend that had been declared prior to the end of its June 30, 2023 financial year. The entry to pay the dividends includes a debit to:

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