What account is reduced when a dividend is declared?

What account is reduced when a dividend is declared?

• A. Dividends
• B. Retained Earnings
• C. Common Stock
• D. Accounts Payable

Answer: (B)

When a dividend is declared, the account that is reduced is Retained Earnings. Retained Earnings represents the accumulated income of a company that has not been distributed to shareholders as dividends. When a company decides to distribute dividends, it reduces the Retained Earnings account to reflect the distribution of profits to shareholders. This reduction occurs because dividends are a distribution of earnings, and once declared, they represent an obligation the company has to its shareholders. Therefore, the declaration of dividends results in a decrease in the total amount of retained earnings available for reinvestment or other business purposes. In contrast, the other options do not directly represent the impact of declaring dividends. The Dividends account usually tracks the amount of dividends declared or paid, Common Stock reflects the ownership equity in the company, and Accounts Payable is related to obligations to creditors and does not interact directly with dividends.

When a dividend is declared, the account that is reduced is Retained Earnings. Retained Earnings represents the accumulated income of a company that has not been distributed to shareholders as dividends. When a company decides to distribute dividends, it reduces the Retained Earnings account to reflect the distribution of profits to shareholders.

This reduction occurs because dividends are a distribution of earnings, and once declared, they represent an obligation the company has to its shareholders. Therefore, the declaration of dividends results in a decrease in the total amount of retained earnings available for reinvestment or other business purposes.

In contrast, the other options do not directly represent the impact of declaring dividends. The Dividends account usually tracks the amount of dividends declared or paid, Common Stock reflects the ownership equity in the company, and Accounts Payable is related to obligations to creditors and does not interact directly with dividends.