When a company declares a cash dividend, the recording will be Debit
[ Select ]
Dividend Expense
Retained Earnings
Dividend Payable
Cash
Profit and Loss
and Credit
[ Select ]
Account Payable
Retained Earnings
Cash
Dividend Expense
Dividend Payable
..

Question

When a company declares a cash dividend, the recording will be Debit 
[ Select ]
Dividend Expense
Retained Earnings
Dividend Payable
Cash
Profit and Loss
 and Credit 
[ Select ]
Account Payable
Retained Earnings
Cash
Dividend Expense
Dividend Payable
 ..

BlackTom AI · Accepted Answer

The question asks about the journal entry when a company declares a cash dividend, presenting two dropdowns for the Debit and the Credit sides.
First, consider the Debit side options and evaluate their appropriateness in the context of declaring a cash dividend. 
- Retained Earnings: This is the correct choice for the debit because declaring a cash dividend reduces stockholders' equity, which is reflected by a debit to Retained Earnings. This aligns with the accounting rule that dividends payable reduce retained earnings when declared.
- Dividend Expense: This account is used to record costs related to distributing dividends to shareholders in some contexts, but not for the declaration of a cash dividend. Dividends are not expenses; they reduce equity, so Debit Dividend Expense would misrepresent the transaction.
- Cash: Debiting Cash would imply an outflow of cash or an increase in cash, which is the opposite of what occurs when a dividend is declared. The cash outflow happens later when the dividend is paid, not at declaration.
- Account Payable, Dividend Payable, etc.: These are not typically debited on declaration; they relate to liabilities or payables and do not reflect the reduction in equity that occurs at declaration.

Now, examine the Credit side options and determine which is appropriate for a cash dividend declaration.
- Dividend Payable: This is the correct credit for the declaration of a cash dividend. Declaring a dividend creates a liability to shareholders, which is recorded as Dividend Payable until the dividend is paid.
- Account Payable: This broadly covers payables, but for a specific dividend declaration the appropriate liability is Dividend Payable, not a generic Accounts Payable.
- Retained Earnings: Crediting Retained Earnings would be incorrect because the reduction in equity is recorded on the Debit side; the liability created should be separate from the equity reduction, not a direct credit to Retained Earnings.
- Cash: Crediting Cash would imply an immediate cash outflow at declaration, which does not occur at the declaration date; cash is affected when the dividend is actually paid.
- Dividend Expense: As noted above, dividends are not expenses; crediting Dividend Expense would misstate the nature of the transaction.

In summary, the proper accounting for cash dividend declaration involves debiting Retained Earnings to reflect the reduction in equity and crediting Dividend Payable to recognize the liability to pay the dividend. The other options either reflect the wrong account type (expense, cash, or generic payables) or reverse the intended effect of the declaration.

BACC012 Online Quiz- Week 8 | LA008

When a company declares a cash dividend, the recording will be Debit [ Select ] Dividend Expense Retained Earnings Dividend Payable Cash Profit and Loss and Credit [ Select ] Account Payable Retained Earnings Cash Dividend Expense Dividend Payable ..

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