In double-entry accounting, what is the net effect of declaring a cash dividend on common stock prior to payment?
AIncrease Retained Earnings, Decrease Cash
BDecrease Retained Earnings, Increase Dividends Payable
CDecrease Cash, Decrease Liabilities
DIncrease Assets, Increase Equity
Explanation
• On the declaration date, cash dividends reduce Retained Earnings (or Dividends account) and create a current liability (Dividends Payable).
• Cash balance is unaffected until actual payment date.
• On payment date, debit Dividends Payable and credit Cash.
Exam Relevance
- Topic: Financial Accounting
- Subtopic: Dividend Accounting
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