When a company declares a dividend, which of the following occurs on the balance sheet?

When a company declares a dividend, which of the following occurs on the balance sheet?

• A. Cash increases and Retained Earnings decreases
• B. Dividends Payable increases and Retained Earnings decreases
• C. Assets increase and Liabilities decrease
• D. Equity increases and Cash decreases

Answer: (B)

When a company declares a dividend, it reflects a commitment to distribute a portion of its retained earnings to shareholders. This declaration results in a liability for the company, which is recognized as "Dividends Payable" on the balance sheet. As soon as the dividend is declared, the retained earnings decrease because the company is allocating a portion of its profits to be distributed rather than retained for reinvestment in the business. Thus, the balance sheet shows an increase in liabilities due to the creation of the Dividends Payable account, alongside a decrease in equity represented by the reduction in Retained Earnings. This transaction does not affect cash or other assets until the actual payment of the dividend occurs. Therefore, the accurate outcome following the declaration of a dividend is an increase in Dividends Payable and a corresponding decrease in Retained Earnings.

When a company declares a dividend, it reflects a commitment to distribute a portion of its retained earnings to shareholders. This declaration results in a liability for the company, which is recognized as "Dividends Payable" on the balance sheet. As soon as the dividend is declared, the retained earnings decrease because the company is allocating a portion of its profits to be distributed rather than retained for reinvestment in the business.

Thus, the balance sheet shows an increase in liabilities due to the creation of the Dividends Payable account, alongside a decrease in equity represented by the reduction in Retained Earnings. This transaction does not affect cash or other assets until the actual payment of the dividend occurs. Therefore, the accurate outcome following the declaration of a dividend is an increase in Dividends Payable and a corresponding decrease in Retained Earnings.