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Understanding Cash Dividends: How They Affect Financial Accounts
dividends retained earnings cash account credit debit
When a company declares and pays a cash dividend to its shareholders the: Dividends account will be decreased with a debit (DR). Retained Earnings account will be directly increased with a credit (CR). Dividends account will be increased with a credit (CR). Cash account will be decreased with a debit (DR). Dividends account will be increased with a debit (DR).

When a company declares and pays a cash dividend to its shareholders, the following occurs:

  • The Retained Earnings account will be decreased with a debit (DR), reflecting the distribution of profits to shareholders.
  • The Dividends account will be increased with a credit (CR), recognizing the obligation to pay dividends.
  • The Cash account will be decreased with a debit (DR) when the actual payment is made to shareholders.

So, the correct answer is: Dividends account will be increased with a credit (CR).

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