Question

Kader Co. paid a total of $35,000 in dividends during the current year. The entry needed to close the dividends account is:Select one:

a. Debit Income Summary and credit Cash for $35,000
b. Debit Dividends and credit Cash for $35,000
c. Debit Income Summary and credit Dividends for $35,000
d. Debit Retained Earnings and credit Dividends for $35,000
e. Debit Dividends and credit Retained earnings for $35,000

Answer 1

The correct entry to close the dividends account after paying $35,000 in dividends is to debit Retained Earnings and credit Dividends for the same amount, affecting the company's equity.

The entry needed to close the dividends account when a company such as Kader Co. has paid a total of $35,000 in dividends during the current year is: Debit Retained Earnings and credit Dividends for $35,000. This is because the payment of dividends reduces the company's retained earnings, which is the portion of net income that is held back from distribution to shareholders. Consequently, the correct entry reflects the decrease in retained earnings due to the dividend payment. This closing entry serves to zero out the Dividends account and transfer the balance to Retained Earnings, which is shown in the equity section of the balance sheet.