Q12RQ - Horngren'S Financial And Managerial Accounting

Question

What is the effect on the accounting equation when cash dividends are declared? 

What is the effect on the accounting equation when cash dividends are paid?

Step-by-Step Solution

Answer

Dividend declared- Current liability increases and Stockholder's Equity decreases - Dividends Payable is credited and Retained Earnings are debited.

Dividend paid- Current assets and current liabilities are decreased- Cash is credited and Dividend payable is debited.

Step 1: Introduction to the topic

The dividend is the distribution of earnings by the business organization to the owners of the business organization. The dividend is paid to preferred and common stockholders.

Step 2: Effect of dividend declaration and payment on accounting equation-

When the dividend is declared, it increases the current liability and decreases the stockholders’ equity, whereas when a dividend is paid, the Current assets and current liabilities are reduced.

It is better understood with the tabular presentation shown below:

	Assets =	Liabilities +	Stockholders’ equity
Dividend declared
Dividends Payable	-	Increase	-
Retained Earnings	-	-	Decrease
Dividend Paid
Cash	Decrease	-	-
Dividends Payable	-	Decrease	-