A company declared and paid dividends of $1,300.How does this transaction affect the accounting equation?
A)Add $1,300 to Revenue and add $1,300 to Cash.
B)Add $1,300 to Dividends and add $1,300 to Accounts Receivable.
C)Subtract $1,300 from Retained Earnings and subtract $1,300 from Cash.
D)Add $1,300 to Dividend Expense and subtract $1,300 from Cash.

Question

Quizplus · Accepted Answer

When a company declares and pays dividends, it is reducing its retained earnings (a component of shareholders' equity) by the amount of the dividend payment. This transaction decreases the accounting equation on the equity side while increasing the liability side of the equation by reducing the cash holdings of the company. Therefore, we will subtract $1,300 from retained earnings and subtract $1,300 from cash to reflect the transaction accurately. Option A is incorrect because dividends are not considered revenue. Option B is incorrect because dividends are not an account receivable. Option D is incorrect because dividends are not an expense.

A Company Declared and Paid Dividends of $1,300