When a company declares a cash dividend, the recording will be Debit Retained Earnings and Credit Dividend Payable ..

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BlackTom AI · Accepted Answer

The question concerns the journal entry made when a company declares a cash dividend. In this situation, the declaration creates a liability and reduces retained earnings. 
Option: Retained Earnings. This is correct because retained earnings represent the accumulated net income retained in the business, and declaring a dividend reduces this equity account. The entry will debit Retained Earnings to decrease it. 
Option: Dividend Payable. This is also correct because declaring a dividend creates a liability to shareholders. The company now owes this amount and records a credit to Dividends Payable (often titled Dividends Payable or Dividend Payable depending on formatting). The credit increases the liability account. 
Why the pair makes sense together: debiting a equity account (Retained Earnings) reduces owners’ claim, while crediting a liability (Dividends Payable) acknowledges the obligation to pay out cash to shareholders. 
Common point of confusion to avoid: some students mix up the accounts by debiting Cash or crediting Retained Earnings. Debit entries happen to reduce assets or equity, while credits record increases in liabilities or equity. In the declaration step, cash is not yet paid, so Cash is not affected; only the reduction in retained earnings and creation of a payable liability occur. 
If someone encounters a variant naming, such as Dividends Payable with an ‘s’ at the end, the underlying concept remains the same: a liability is created and retained earnings are reduced. The net effect is a decrease in equity and an increase in current liabilities, reflecting the upcoming cash distribution to shareholders.

BACC012 Online Quiz- Week 8 | LA008

When a company declares a cash dividend, the recording will be Debit Retained Earnings and Credit Dividend Payable ..

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