How is 'Dividends Declared' affected by a debit entry?
Understand the Problem
The question is asking about the impact of a debit entry on 'Dividends Declared' within the context of accounting. The user seeks to understand which financial statement effect (such as changes in liabilities, assets, revenue, or equity) results from a debit entry related to dividends declared.
Answer
A debit entry to 'Dividends Declared' reduces retained earnings.
'Dividends Declared' is affected by a debit entry since it reduces the retained earnings account. In the process of declaring dividends, the journal entry typically involves a debit to retained earnings and a credit to dividends payable.
Answer for screen readers
'Dividends Declared' is affected by a debit entry since it reduces the retained earnings account. In the process of declaring dividends, the journal entry typically involves a debit to retained earnings and a credit to dividends payable.
More Information
When a company declares a dividend, they decrease their retained earnings by the amount of dividends declared, reflecting this as a debit. This doesn't immediately affect cash flow until the dividends are actually paid.
Tips
A common mistake is confusing the declaration and payment of dividends. The declaration involves a debit to retained earnings, while the payment involves a debit to dividends payable and a credit to cash.
Sources
- Dividends Payable | Formula + Journal Entry Examples - wallstreetprep.com
- How to account for cash dividends - AccountingTools - accountingtools.com
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