Final answer:
The entry to record the declaration of a cash dividend includes a debit to Retained Earnings and a credit to Dividends Payable. This reflects the company's liability to pay shareholders and impacts the company's retained earnings and liabilities.
Step-by-step explanation:
The entry to record the declaration of a cash dividend involves a debit to Retained Earnings and a credit to Dividends Payable. When a firm decides to distribute dividends, it acknowledges its obligation to pay its shareholders. This accounting entry does not involve cash directly but rather recognizes the company's promise to pay, effectively reducing retained earnings and increasing current liabilities. Dividends are essentially a portion of the company's profits paid out to shareholders, and investors often consider them as part of their expected rate of return on an investment, along with potential capital gains from an increase in stock value over time. For instance, if an investor purchases a stock for $45 and later sells it for $60, they realize a $15 capital gain, which is the increase in the asset's value from the time of purchase to the time of sale.