Do Cash Dividends Decrease Retained Earnings

The Effect Of Cash Dividend On Retained Earnings

Yes, cash dividends decrease Retained Earnings Account as it is paid out of it to stockholders or shareholders of the company or the corporation.

In fact, Dividend is a Contra Equity Account and it is closed to retained earnings account. Retained earnings is a part of equity account.

The normal or usual balance of dividend is on debit side while the normal balance of retained earnings is on credit side in retained earnings t account, so dividend is deducted from the retained earnings account.

The journal entry to close or transfer dividend account to retained earnings account is shown below:

                                                                 Retained Earnings a/c  XXX

 

                                                                                                          Dividend a/c  XXX

 

                                                                (Dividend Is Transferred To Retained Earnings Account)

From the journal entry, it is clear that dividends decrease retained earnings account as retained earnings is debited which is a unusual side for it.

When dividend is paid to stockholders or shareholders for cash, then cash as a current asset is decreased and dividend account is increased which decreases the stockholder's equity account as dividend is deducted from retained earnings which is a part of the stockholder's equity account.