Final answer:
A company can pay dividends only if it has a sufficient balance in its retained earnings account, which is a part of the company's net worth. This account's balance reflects the company's financial health and determines its capacity to distribute profits as dividends.
Step-by-step explanation:
A company can pay dividends only if it has a sufficient balance in its retained earnings account. This account represents the portion of net income that a company decides to keep, rather than distribute to shareholders as dividends. In the context of T-accounts, the assets on the left must balance out liabilities and net worth, which is affected by retained earnings, on the right. A healthy business will display a positive net worth, enabling it to cover dividends and indicate financial stability to shareholders.
Dividends represent a percent of the profits of a company and are paid to shareholders based on the number of shares they own. Companies like Coca-Cola and electric companies, known for their stability, frequently offer dividends to their shareholders, who can rely on this as a form of income. Therefore, ensuring a healthy balance in the retained earnings account is essential for a company to maintain its ability to provide dividends without compromising its financial standing.