Question

When a company pays $2,800 dividends to its stockholders, the transaction should be recorded as:

Debit dividends; credit accounts payable.
Debit retained earnings; credit dividends.
Debit cash; credit dividends.
Debit dividends; credit cash.

Answer 1

The correct answer is Debit dividends; credit cash.

Step-by-step explanation:

• First seat :

Earnings Accrued (- Net Equity)

to various creditors (+ Liabilities)

Since the minutes of the assembly must indicate that they are taken from the profits of previous years, the accumulated profits are reduced.

• Second seat

Miscellaneous creditors (- Liabilities)

to Banks (- Active)

The first entry represents transfer from one liability to another liability. Although we think that capital accounts are not liabilities, it is not true, given that the value of debt to shareholders of the value of your company, so we can group everything in the same bag.

When decreeing dividends, what is done is to cover a small part of that company value. That is, when dividends are decreed, they become part of a formalized liability.

The second entry is the cancellation of the liability, through one of the ways to extinguish the obligations: payment.