Question

Although the payment of dividends reduces Retained Earnings, why is the Dividends Declared account not considered an expense account?

Answer 1

Dividends Declared account is not an expense account but represents a distribution of profits to shareholders.

Step-by-step explanation:

The Dividends Declared account is not considered an expense account because it does not represent a cost incurred by the company in its day-to-day operations. Instead, dividends are a distribution of profits to the shareholders. While they reduce Retained Earnings, they do not represent an expense that is deducted from revenue to calculate net income.

For example, let's say a company has a net income of $1 million and pays $200,000 in dividends. The $1 million would be reported as revenue, and the $200,000 would be deducted from Retained Earnings. However, it wouldn't be classified as an expense in the income statement.