What is the effect on the accounting equation when cash dividends are paid?
Corporations issue common stock in exchange for equity shares of the company. Once the corporation earns a profit they will often pay dividends to their shareholders out of retained earnings. Retained earnings represents the income over the life of the corporation.
Answer and Explanation:
The accounting equation is calculated as:
Assets = Liabilities + Owner's Equity
When cash dividends are paid total assets are decreased with the payment of cash and total liabilities are decreased with the reduction in dividends payable. Dividends payable is established when the board of directors declares that a cash dividend is going to be paid.
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Learn more about this topic:
from Finance 101: Principles of FinanceChapter 16 / Lesson 1