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

Question

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

BlackTom AI · Accepted Answer

The question asks about the journal entry when a company declares a cash dividend, focusing on which accounts are debited and credited.
First, consider the nature of a dividend declaration: the company commits to paying cash to shareholders, which reduces retained earnings and creates a liability to pay the dividend. This means the debit should reduce equity via Retained Earnings, and the credit should recognize a liability to pay the dividend, typically Dividend Payable.
For the Debit side:
- Retained Earnings: This is the correct account to be debited because declaring a dividend reduces retained earnings, which is a component of shareholders’ equity. Debit entries increase asset or expense accounts and decrease liability or equity accounts; here, equity (retained earnings) is decreased.
- Dividend Expense: This is not appropriate at declaration for a cash dividend. Dividend expense would be used if declaring a distribution from earnings to owners in a different context (and it is not the standard accounting treatment for a cash dividend declaration).
- Cash: Not affected at the declaration stage. Cash is disbursed later when the dividend is paid, not when it is declared.
- Debit to Account Payable: While Accounts Payable is a liability, the standard dividend declaration creates a specific Dividend Payable liability, not a generic accounts payable.

For the Credit side:
- Dividend Payable: This is the correct credit to record the obligation to pay the dividend to shareholders. It creates a current liability until payment is made.
- Retained Earnings: Crediting Retained Earnings would double-count or improperly reduce equity; the reduction is already recorded on the debit side.
- Dividend Expense: Not appropriate here, as discussed above.
- Cash: Cash is not credited at declaration because the cash outflow occurs only when the dividend is paid.
- Account Payable: While this is a liability account, the common practice for dividends is to use Dividend Payable as the specific liability, not the general Accounts Payable.

Putting it together, the proper entry for declaring a cash dividend is:
Debit Retained Earnings; Credit Dividend Payable.
The other options do not align with the standard accounting treatment for a declaration of a cash dividend, either because they involve the wrong accounts for debiting (e.g., Dividend Expense, Cash) or the wrong credits (e.g., Cash, Account Payable, or Retained Earnings).

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

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