When a cash dividend is declared and paid, which accounts are affected?

• A. Increase cash and decrease retained earnings
• B. Decrease cash and decrease retained earnings
• C. Increase retained earnings and cash
• D. No effect

Answer: (B)

When a cash dividend is declared and paid, it reduces both cash and retained earnings. Declaring the dividend creates a liability (dividends payable) and lowers retained earnings, since earnings are being distributed. When the dividend is paid, that liability is settled and cash decreases. Net effect: assets (cash) go down and shareholders’ equity (retained earnings) goes down, with no impact on revenue or net income.